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Ovo has struck a £500m deal to buy the household business of larger rival SSE in a bold move that will make it Britain’s biggest energy supplier behind British Gas.
Founded by former City trader Stephen Fitzpatrick a decade ago as a challenger to the so-called big six energy companies, Bristol-based Ovo will be propelled into the top flight with an 18 per cent market share, just behind British Gas on 19 per cent. It is currently the seventh-largest supplier, with 5 per cent of the market.
Ovo has agreed a headline price of £400m in cash for SSE’s retail business in Britain, although £59m will be deducted to cover future payments associated with a UK back-up power scheme. Ovo will also issue a £100m loan note to SSE that will be due for repayment in 2029 and carry an annual interest rate of 13.29 per cent, giving an overall enterprise value of £500m.
The deal, which the companies expect to complete later this year or early in 2020, will come as a relief for SSE, which had been trying to offload its retail business after the collapse of a previous agreement to merge it with German-owned Npower and spin off the combined company.
SSE wants to focus on its power generation business and regulated energy networks, although it will retain its household supply businesses in Northern Ireland and Ireland.
For Ovo the deal is the latest sign of Mr Fitzpatrick’s ambition to shake up a market undergoing rapid change as energy companies face challenges such as the rise of electric vehicles and the introduction of smart meters that provide live data on electricity and gas usage, rather than the traditional system of quarterly meter readings.
Mr Fitzpatrick, who this year sold a 20 per cent stake in Ovo to Japan’s Mitsubishi Corp, said he first approached Gregor Alexander, SSE’s finance director, more than a year ago and “indicated that if anything went awry with their tie-up with Npower, we’d be interested in talking to them about it”.
The biggest UK energy suppliers have had a torrid few years as an explosion of smaller companies able to undercut their larger competitors due to lower cost bases has eaten up market share. The introduction this year of a government-mandated price cap for 11m households has also hit the big six.
Mr Fitzpatrick said he believed Ovo was well placed to navigate a market from which others are trying to withdraw as it had made big investments in technology in recent years that would allow it to address the sector’s growing complexity.
Many energy companies admit they can no longer rely on simply supplying electricity and gas to households to survive and have been expanding into new services, such as helping electric vehicle owners charge their cars when there is a surplus of renewable electricity.
Deepa Venkateswaran, analyst at Bernstein, said the deal’s enterprise value of £500m was “double what was previously expected” and compared with a book value of £764m.
SSE shares rose 1.7 per cent on Friday morning.
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