General Utilities PLC and The Mid Kent Water Company: A report on the merger situation

Summary of report (html format)
Full text (pdf format)

Adobe Acrobat Reader can be downloaded from http://www.adobe.com

Summary

On 4 January 1990, the Secretary of State asked us to investigate whether a merger situation had been created after 11 January 19891 between water enterprises under the control of General Utilities PLC (GU) and the Mid Kent Water Company (Mid Kent Water) (see Appendix 1.1).

Mid Kent Water is the largest statutory water company (SWC) in Kent and Sussex. GU is a subsidiary of Compagnie Générale des Eaux (CGE). GU controls or has major shareholdings in a number of other United Kingdom water companies.

GU bought 15 per cent of the share capital of Mid Kent Water in June 1988. It bought further shares on 8 March 1989, taking its holding to just under 30 per cent. In March to May 1989 shareholders of Mid Kent Water exchanged their shares for equivalent holdings in Mid Kent Holdings plc (Mid Kent Holdings) as a result of which Mid Kent Holdings acquired 99 per cent of the shares of Mid Kent Water. GU now has 29 per cent of the share capital of Mid Kent Holdings and is the largest shareholder.

A merger situation would be created if GU's increased holding in Mid Kent Water or in Mid Kent Holdings gave it the ability materially to influence the policy of Mid Kent Water. If this ability had arisen before 11 January 1989, the merger would not qualify for investigation under the Water Act. We concluded that GU had acquired the ability materially to influence the policy of Mid Kent Water and that a merger situation had been created after 11 January 1989.

The Water Act provides a special test that must be applied in considering whether a water merger is likely to be against the public interest. The MMC 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 water enterprises. As a result of various mergers that have already occurred, some 15 of the 29 SWCs are under the control of four major groups, which also have major shareholdings in five other SWCs. Only about eight SWCs appear to be independent of control or major influence by other water enterprises.

Against this background, we accepted that it was important that Mid Kent Water should remain independent for the purposes of the DGWS's ability to make comparisons. We expected that GU would in due course become more directly involved in the management of Mid Kent Water. This would reduce the independence of the observations from Mid Kent Water to the DGWS. We concluded that the merger would reduce the number of water enterprises under independent control so as to prejudice the DGWS's ability to make comparisons between different such water enterprises.

While there are likely to be benefits from the merger, those which could not be achieved without prejudice to the principle mentioned above are not of substantially greater significance in relation to the public interest than that principle. While there may be certain other benefits, such as participation in the General Utilities Scientific and Technical Organisation (GUSTO) and some contribution to the development of complementary business activities, such benefits would not outweigh the detriment. We concluded therefore that the merger situation may be expected to operate against the public interest.

Our concerns would be met if CGE and GU had no involvement in the management of Mid Kent or in the formulation of policy (including access to information from Mid Kent which could be relevant to the DGWS's functions in relation to Mid Kent Water); if CGE and GU were not represented on the board of either company; and if GU did not use its power to block special resolutions of Mid Kent Holdings. We recommend that undertakings on such matters should be secured. If satisfactory undertakings could not be obtained, the only alternative remedy would be for CGE and GU not to be represented on the board of either Mid Kent company and for GU to divest to a holding at which it would not have the ability materially to influence policy.

Full text

Back to the top