SSE sparks new merger talks over £1bn energy retail arm
SSE, one of Britain’s biggest gas and electricity suppliers, is scrambling to find a buyer or merger partner for its £1bn retail division months after scrapping a tie-up with rival Npower.
Sky News has learnt that SSE – formerly known as Scottish & Southern Energy – has held preliminary talks with a number of other utility providers, including TalkTalk, in recent weeks.
SSE has promised to update investors on the future of its retail business when it reports full-year results on May 22.
City insiders said this weekend it had stepped up efforts to find a suitor for the division, which supplies close to 6m households across Britain.
Alistair Phillips-Davies, SSE’s chief executive, is said to value the unit at about £1bn, a sum which is higher than some analysts believe it is worth.
A source close to SSE, which is being advised by Credit Suisse and Morgan Stanley, said it had floated the idea of a potential merger with TalkTalk, the broadband and telecoms supplier, in the last fortnight.
However, a tie-up between the two companies is regarded as highly unlikely to proceed.
The source said that other utility providers had also been sounded out about their appetite for a deal.
SSE said in December that it would look for “an alternative transaction” for its Energy Services business when it announced that the merger with npower was being scrapped.
It added that demerging the division and gaining either a premium or standard listing on the London Stock Exchange was also under consideration.
City analysts and investors believe that outcome, too, has only a remote prospect of being achieved, partly because of the balance sheet constraints resulting from the amount of collateral that retail energy suppliers are required to hold.
Ring-fencing SSE Energy Services while retaining ownership is another possibility for the FTSE-100 group.
Insiders said that Mr Phillips-Davies and his boardroom colleagues were determined to provide “concrete news” on the fate of the retail business, which is expected to make more than £100m of profit this year, next month.
The UK’s energy retail market has been shaken up by a series of Government-commissioned measures aimed at bolstering competition, and ending what critics have argued is oligopolistoc behaviour by the ‘big six’ suppliers.
In its statement announcing the abandonment of the npower deal, SSE cited “multiple factors including the performance of the respective businesses, clarity on the final level of the default tariff cap, changing energy market conditions and the associated implications of these for both the joint business plan and the market in which the business would be operating”.
More recently, SSE, which has a market value of close to £12bn, issued a profit warning on the back of a freeze in the UK’s energy capacity market auction, which pays companies to provide back-up power during the winter.
It was unclear this weekend whether SSE was trying to combine its retail arm with any of the smaller companies outside the big six players.
The likes of Ovo Energy have made substantial inroads into the market in recent years, amassing sizeable customer bases.
The market’s biggest supplier, British Gas, has had a torrid time, haemorrhaging customers and seeing the value of its parent company, Centrica, slump by nearly a third during the last year.
In December, Sky News revealed that Centrica was seeking a judicial review over the way the regulator, Ofgem, had calculated wholesale energy prices for the purpose of the new cap.
The advent of greater competition has not been without problems for Ofgem.
Almost a dozen smaller suppliers have collapsed in the last 18 months, including Brilliant Energy and Economy Energy, after finding they were unable to meet the costs of doing business.
The spate of failures has prompted Ofgem to tighten the rules for companies wanting to enter the market.
SSE and TalkTalk declined to comment.