Regulator urged to allow Terra Firma licence
- From: Vol 6, Issue 8 (August 2005)
- Category: General
- Region: Europe
- Country: Ireland
- Related Companies: Concateno, Phoenix, Sutton & East Surrey Water and Terra Firma
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The government presses the regulator to agree licence terms for the Sutton & East Surrey takeover.
The Northern Ireland energy regulator is under pressure to agree licence terms that will enable Terra Firma to acquire Sutton & East Surrey Water’s parent company, after the government sanctioned the takeover at the end of July.
When energy minister Angela Smith announced that Guy Hand’s private equity group had received the go-ahead from the Department of Enterprise, Trade and Investment, she said it was essential that the current discussion of the licence for East Surrey Holding’s Phoenix gas business was concluded “as quickly as possible”.
Smith also stressed that the current uncertainty over the regulatory price controls for the Belfast-based business should be resolved “in a manner that will deliver tangible consumer benefits and reinforce investor and consumer confidence in the gas industry”.
The uncertainty arose when Douglas McIldoon, chairman of the Northern Ireland Authority for Energy Regulation, suggested in June that the £453 million bid from Terra Firma might mean he would need to
renegotiate the terms of Phoenix’s “interim” licence agreement to ensure a fair split of benefits between customers and investors. His intervention threatened to scupper the Terra Firma bid and subsequent sale of Sutton & East Surrey – Hand’s firm only wants the high-growth Phoenix business.
Terra Firma, which had fast-tracked the acquisition through a scheme of arrangement, and East Surrey’s shareholders were stunned by the decision as they had assumed that the licence agreement Phoenix signed with the regulator in July 2004 was now governing the business.
“Our view on it was that it was a firm agreement,” explained Phil Holder, managing director of East Surrey Holdings. “It’s actually the basis of the current [Phoenix] charges.”
McIldoon’s intervention also drew criticism from industry business and other regulators, which warned that such retrospective action could do great damage to investor confidence in regulated industries. “I think the notion that a bid premium is evidence that an RAV is wrong is bizarre,” commented an industry consultant.
Meanwhile, senior officials at Ofgem, the UK’s main gas and electricity regulator have privately expressed their disapproval. “They’re not particularly happy that he’s gone down this route,” said the consultant.
Nevertheless, the regulator’s warning that the 2004 licence agreement might need renegotiating led most to believe that Terra Firma would pull out of the acquisition citing a “material adverse change”. But the DETI clearance and the minister’s statement have clearly increased confidence among interested parties that the Terra Firma takeover will now go ahead.
“They seem to have got some political support now,” commented Keith Tozzi, the chief executive of the Concateno vehicle that is expected to make a bid for Sutton & East Surrey Water if Terra Firma is successful.
The mounting pressure on McIldoon has certainly strengthened belief in the markets that Terra Firma’s bid will prevail. Whereas East Surrey’s share price languished below 500p after the regulator suggested modifying the Phoenix licence – compared with the 523p offer price – it rose to around the 520p mark following the DET announcement. “I think the general view now is that it’s going to happen,” said Tozzi.