Water watchdog’s defeat turns on cash taps for (some) shareholders

It’s not (yet) a crisis in the world of water regulation, but a heavy defeat for Ofwat, trying to land its “toughest ever” price settlement, is a big moment. Four companies rebelled over proposed steep cuts to bills and, to varying degrees, all got something from the video assistant referee (VAR), meaning the Competition and Markets Authority.

Appeals haven’t succeeded often. In the 30 years since water privatisation in England and Wales, few companies have challenged their so-called price determinations, which set bills for five-year periods. Even when they have, the regulator has normally won on the main points.

The rebellious four – Anglian Water, Bristol Water, Northumbrian Water and Yorkshire Water – framed their arguments as a question of investment. Push us too hard on bills, they said, and we can’t fund better infrastructure to stem leaks and cut pollution.

You can do both, Ofwat said, trying to overturn a multi-decade reputation for being a patsy that couldn’t spot the easy jackpots made by monopoly businesses, especially the over-leveraged brigade beyond the gaze of the stock market. It championed an average £50 cut in bills and an increase in investment.

A few tweaks under the CMA’s lens might have been expected. Should Yorkshire get extra cash for stronger flood defences in Hull? And how much for Anglian for new connectors for parts of Essex that have “less rain than Jerusalem”? Some fiddling by the CMA on local questions was hardly a surprise.

But there was one big – and unexpected – difference between Ofwat’s view of the wider landscape and the CMA’s. It relates to the definition of a fair return for investors. The regulator assumed a weighted average cost of capital (WACC) for the companies of 2.96%. The CMA went for 3.5%.

The difference may sound slight, but, magnified over five-year spending programmes, it represents a big win for shareholders. Ofwat pushed for lower bills and lower returns for investors; the CMA said, in effect, that it went too far and was risking investment. That’s a fundamental difference of opinion and leaves Ofwat exposed.

The win for shareholders, however, is only for investors in the four companies that appealed. The other 13 water companies in England and Wales accepted their settlements, so they’re stuck with them, complete with lower WACC. They will wish they had also run off to the CMA. Maybe they will next time if challenges are seen to have more chance of succeeding, which is a long-term complication.

The CMA’s findings are merely provisional at this stage so there’s time for the dial to turn again. But, as things stand, some big questions have been thrown in the air: the right balance between bills and investment in the era of climate change, and the authority of Ofwat. As with VAR in football, the position looks messy.

Debt in tow slows AA’s takeover

AA patrol vehicles have a decent reputation for turning up within a reasonable time. Not so bidders for the debt-laden AA itself. The deadline for takeover merchants to put their money on the table was, on Tuesday, once again extended by a month.

Since the shortlist of potential bidders is down to one these days – a consortium effort by private equity firms TowerBrook Capital Partners and Warburg Pincus – this auction is turning into a drab affair. Amid the complete absence of competitive tension, AA shares fell a further 3% to 28.6p, valuing the company at just £178m.

The reason for that pitiful valuation is, of course, the dead weight of £2.6bn of net debt that the AA is still towing after its last spell under private equity ownership. If a cash bidder wants to put shareholders out of their misery, the board is obliged to take a look.

But plan B – “potential refinancing options, including the possibility of raising new equity” – looks increasingly as if it may be required. The board needs to be ready: it may be its only option.

Sainsbury’s pick-and-mix

It is baffling why retired retailers are deemed the best people to run the NHS test-and-trace programme. It’s even harder to understand why former Sainsbury’s executives are so over-represented.

Mike Coupe, former Sainsbury’s chief executive, is the new head of testing, reporting to Dido Harding, who, before her undistinguished outing as boss of TalkTalk, was head of the supermarket group’s convenience stores. Just one question, though: shouldn’t the reporting line be the other way around?

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