Plans to merge two of the UK’s largest energy suppliers have been scrapped after SSE and Innogy failed to reach a revised agreement to provide financial support to the new company.
The deal to combine SSE’s retail arm with Npower, the UK retail business of Germany’s Innogy, would have reduced the UK’s “Big Six” energy providers to five. It was thrown into doubt last month after a year of planning when the companies said they would restart negotiations on “commercial terms” to ensure the new company had sufficient financial strength to successfully list on the London Stock Exchange.
But SSE said on Monday it had decided to pull the plug on the deal as it did not believe the new company would be able to meet trading collateral requirements and would not be able to gain a premium listing.
“We closely monitored the impact of all developments and continually reviewed whether this remained the right deal to do for our customers, our employees and our shareholders. Ultimately, we have now concluded that it is not,” said Alistair Phillips-Davies, chief executive of SSE.
“We believed at the time it was the right thing in terms of what we saw. There was a significant prize to go for,” he added. “But market conditions changed over the past 13 months.”
SSE will now look to spin off its retail business in a different way, such as a standalone demerger and listing or sale, although no offers have yet been received and analysts suggested it would struggle to gain a listing as a standalone business.
Mr Phillips-Davies said the deal had been hampered by a combination of factors including the level of a price cap on some bills being introduced from January, the performances of the two businesses and a “very, very competitive market”.
While the introduction of the cap on default tariffs had been flagged in advance of the merger’s announcement in November 2017, Mr Phillips-Davies said: “We felt Ofgem [the energy regulator] had set it more tightly than expected and more tightly than people realised.”
Innogy, which had already been reporting Npower as discontinued operations, said including the business in its 2019 figures would have a negative impact on earnings of €250m.
“We negotiated intensively with SSE on adjustments to the transaction as announced in November 2017. Unfortunately, we could not reach an agreement that was acceptable for both sides. We are now assessing the different options for our British retail business,” said Martin Herrmann, COO for retail at Innogy.
“Knowing what we know now about how the businesses have performed over the past 12 months I don’t think it’s particularly surprising [that the merger has failed],” said Gavin Kennedy, an analyst at Bernstein.
“I think it is symptomatic . . . of how relatively severe the cap was for them. It was in line with our expectations, but SSE and Innogy expected it to be higher. I don’t know why.”
Shares in Innogy traded down by 3 per cent on Monday morning, while SSE shares were down 2 per cent.