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SSE outlines merger synergies

The new company would have higher than anticipated levels of debt and synergies
June 28, 2018

The Competition and Markets Authority’s (CMA) investigation into the proposed demerger and combination of SSE’s (SSE) household energy division and Npower may be ongoing, but the energy giants are going full steam ahead with their operational plans regardless. The former has released a shareholder circular with more than 200 pages of details about the new group, proposing two shareholder resolutions that could make it happen.

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SSE shareholders will vote on two new resolutions related to the deal at the annual general meeting on 19 July. The first is to approve the payment of a special dividend in kind, giving shareholders stock in the new company – the proposed group is intended to be listed on the premium segment of the London Stock Exchange’s main market. The second is to waive Npower parent company Innogy’s obligation to make a general offer for the issued shares in the new company.

The demerged business was first proposed in November last year, with completion slated for the last quarter of 2018 or the first of 2019. It makes good sense for both SSE and Innogy to spin out their operations in the UK household energy supply market, which has been troubled in recent times by political pressure over prices.

According to SSE’s pro-forma numbers, the proposed company would have had revenues of £10bn in the year to March 2018, with an operating profit of £256m. Analyst RBC Capital Markets noted this was broadly in line with expectations, but added the pro-forma debt level of £680m or 1.7-1.9 times cash profits was higher than previous expectations, which were closer to 1-1.5 times. The combined group is expected to yield annualised synergies of £175m from costs, alongside a one-off £50m capital expenditure benefit within four years of completion, well above RBC estimates of around £110m.

SSE’s shareholders will own 65.6 per cent of the new company on completion of the deal. SSE will provide the new entity with gas and electricity procurement, hedging and other services for up to four years, although the demerged company will be able to source gas and electricity elsewhere during this time.