This wasn’t how it was supposed to be. When water floated (as the ads cringingly put it 20 years ago) the monopolies were to be controlled by a combination of regulation and comparison, putting the weaker of the 10 privatised water businesses under pressure to shape up.
It worked until the managements got bored with running water and splashed out on silly acquisitions. Then the private equity mobs moved in, picking off the prettier companies and replacing equity with debt. The result is that the industry is fading from financial view – the accounts for Thames Water Utilities, for example, are quite hard to find.
Now Severn Trent may become the next to be taken private. Only United Utilities (now effectively stripped back to North West Water) and little Pennon of the original 10 would remain as publicly listed companies. A league table of two is meaningless, and as the sector shrinks, the scrutiny provided by stock market analysts disappears.
That leaves regulation. Companies agree a capital base on which their returns, and hence their charges, are calculated. Paying a 30 per cent premium to this, as the consortium suggests for Severn Trent, should be financial folly. Yet previous private buyers who did so have cleaned up, helped by wholesale replacement of equity by debt. Thames, for example, had borrowed 78 per cent of its regulatory capital value at its March 2012 balance sheet date
The regulator, Ofwat, fixes prices for each five-year period. The preliminary skirmishes for the next round are starting, so expect ritual cries of poverty from the companies – Thames’s beggar’s sore is the proposed £10bn tunnel under the river. Somehow, though, they do better than they expected (brilliant management, of course).
This bid approach threatens to give the game away, providing Ofwat’s newish chairman, Jonson (“Stop”) Cox a reason for hard water regulation. He may also be spurred by the abrupt departure of Regina Finn, the chief executive he inherited. She had the temerity to talk about competition. The companies are not sorry to see her go.
If the bidders persist – and no bid for a water company has yet failed - Mr Cox should tell the industry that the gearing and gaming has gone far enough, and it’s time for the captive customers to benefit instead. That may be painful for us Severn Trent shareholders in the short term, but the bidders are not the only ones who like this low-risk long-term investment.
Don’t tell the Co-operative Group about boardroom diversity. With a nurse, a farmer, a retired telecom engineer, and five female directors out of 20, they’ve got it. They’ve also got it in the neck from Moody’s, and this week S&P has joined in, changing its view of Co-op group credit from stable to negative. Not encouraging for the FT’s 2012 winner of “Europe’s most sustainable bank” award.
The 20 must now decide which bits of the Co-op empire must be jettisoned to keep the bank aloft. The insurance business is already going; fortunately, insurance is almost fashionable again, but it won’t be enough. The funeral parlours made £60m last year, and it’s undoubtably a growth industry, while pharmacy (£28m) would also help a little.
The trickier question is whether to “burden share” (as the euphemism has it) with the lower ranks of creditors. Bottom of the heap are £80m of preference shares, whose next payment is due at the end of the month. The prices of a further £310m of subordinated bonds have also slumped this week on fears that interest payments might be deferred indefinitely. It’s all something of a challenge to this unique branch of financial biodiversity: just how co-operative must we 20 be to be the Co-op?
Merv the poster boy
Mervyn King may never decorate as many student walls as Che Guevara (Castro’s first central bank president) but his reputation, widely trashed last year, is already past its nadir, as the UK economy twitches back into life just in time for his retirement party. Were it possible to invest in BitKings, they would look rather better value than those shiny new Carneys, where the gloss will surely come off once the QE junkies have to go cold turkey.
This is my FT column from last Saturday