Southern Water plc and Mid-Sussex Water Company: A report on the merger situation

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Summary

On 4 January 1990 the Secretary of State for Trade and Industry asked us to investigate the possible merger between Southern Water plc (Southern) and the Mid-Sussex Water Company (Mid-Sussex).

Southern was formerly the Southern Water Authority, one of the ten water authorities established in England and Wales under the Water Act 1973. It supplies water to a population of some 2 million in six areas of Kent, East and West Sussex, Hampshire and the Isle of Wight, and sewerage services to a population of just over 4 million. Mid-Sussex is a statutory water company (SWC), supplying water to a population of 0.25 million in Sussex.

The reference (see Appendix 1.1) was made under section 29 of the Water Act 1989 (the Water Act) (see Appendix 1.2), which requires the Secretary of State to refer certain merger situations between water enterprises created after 11 January 1989 to the MMC.

The reference arose as a result of the purchase by Southern of about 10 per cent of the voting stock in Mid-Sussex in February 1989, a purchase which took its total holding from 14.9 per cent to just over 25 per cent. Mid-Sussex was and remains, however, controlled by SAUR Water Services PLC (SAUR), which had made a successful offer for Mid-Sussex in January 1989. SAUR holds 72 per cent of the capital of Mid-Sussex. It also controls several other water enterprises.

We first had to determine if there was a merger situation qualifying for investigation. A merger situation would be created if Southern's increased holding in Mid-Sussex gave it the ability materially to influence the policy of Mid-Sussex, and if it did not have that ability before its purchase of shares in February 1989. Although it does not have board representation, Southern has the ability, with over 25 per cent of the voting share capital, to block special resolutions. We have concluded that the increased shareholding gave Southern material influence and that it did not have this previously. A merger situation has therefore been created.

The Water Act provides a special test which we must apply in determining whether a merger situation involving water enterprises operates or may be expected to operate against the public interest. We must have regard to the principle that the number of water enterprises under independent control should not be reduced so as to prejudice the ability of the Director General of Water Services (DGWS) to make comparisons between different water enterprises.

We concluded that the merger situation has led to a reduction in the number of independent water enterprises, but that this reduction may not be expected to prejudice the DGWS's ability to make comparisons. An important consideration has been the fact that Mid-Sussex was already controlled by SAUR. We did not consider that there would be any effect upon Mid-Sussex's value as a comparator arising from Southern's shareholding. While it is possible that, as a result of its shareholding, Southern may in future obtain some information from Mid-Sussex which could, in theory, be used in a way which might affect its reports to the DGWS, we do not consider that in practice it is likely to alter the presentation of Southern's information so as to prejudice the DGWS's ability to make comparisons.

We concluded that Southern's shareholding in Mid-Sussex would therefore not give rise to prejudice to the DGWS's functions, or operate in any other respects against the public interest. We concluded, therefore, that the merger situation does not and may not be expected to operate against the public interest.

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