So the merger of SSE’s (SSE) retail arm and that of Npower is off, to the great surprise of nobody.
The UK energy generator and supplier says there were a number of reasons for scrapping a tie-up that was first mooted more than a year ago. For starters, the dismal performance of the respective businesses has contributed, then there are price caps coming in next year and volatile wholesale pricing to contend with.
Basically, SSE, like Npower and the other members of the UK’s so-called big six (British Gas, E.ON, EDF and Scottish Power are the other four) has been struggling to stem the bleeding away of customers. It’s been losing thousands of retail customers because switching away has never been easier.
So while the proposed merger of the consumer supply units of SSE and Npower, owned by German energy group Innogy, was always going to be a complex affair, the rationale was hardly rocket science.
Put two large and workforce-heavy organisations together and strip out millions in duplicated costs - things like accounting departments, HR, customer service and other admin teams.
TWO-SPEED SSE
The plan now remains to split out energy supply from what SSE wants to concentrate on in future - electricity generation, transmission and renewables. This is the bit of the operation where SSE thinks things are more stable and less open to the whims of consumers, even if it remains at the mercy of government and regulator policy.
The relative robustness of National Grid (NG.), say, suggests this line of thought stands up to scrutiny. Grid shares have stayed roughly flat through 2018 (up about 2.5%) whereas SSE’s stock is close on 18% down, based on today’s £10.68.5 level.
‘SSE’s retail arm is set to see operating profit margins more than halve in the current financial year, according to company guidance in November, because of competitive pressures and the anticipated impact of the price cap from 1 January 2019,’ says AJ Bell investment director Russ Mould.
That has put huge pressure on dividends, the chief reason anyone would own the shares given the 8.7% implied yield.
Which suggests that sticking to plans to separate the two sides of the business makes sense. But what shape that will take remains up in the air for the time being. A trade or private equity sale is an option but a spin-out into a separate UK-listed business is also a possibility.
