A liquid market for mergers? Assessing acquisitions in the water industry

In light of the UK Competition Commission’s recent clearance of the proposed merger between Mid Kent Water and South East Water, Alan Horncastle, Oxera Principal, and Professor Subal Kumbhakar, Oxera Associate, examine the analysis that led to the Commission’s decision.

In November 2006 the Office of Fair Trading (OFT) referred the acquisition by Hastings Diversified Utilities Fund (HDUF) and Utilities Trust of Australia (UTA) of South East Water Limited (SEW) to the Competition Commission for investigation and report. HDUF and UTA are also the owners of Mid Kent Water Limited (MKW). On May 1st 2007, the Competition Commission approved the merger between MKW and SEW. Oxera advised Hastings (which made submissions to the Commission on behalf of HDUF and UTA) throughout the inquiry.

Both companies are water-only companies (WOCs). MKW serves a population of around 0.6m in Kent and a small part of East Sussex, making it the sixth-smallest of the 22 water companies. SEW serves a population of around 1.4m (the twelfth-smallest—ie, around average in the industry as a whole, but the second-largest WOC). It serves two distinct, non-contiguous areas—the northern region (including parts of Berkshire, Hampshire, Surrey and West Sussex) and the southern region (including parts of Kent, East Sussex and West Sussex). The southern region shares a boundary with MKW.