Revised water merger regime enters into force

Revisions to the special water merger regime took effect from Friday 18 December. The changes relax the rules for water mergers allowing them to be cleared following a Phase 1 investigation, rather than automatically requiring a Phase 2 investigation. They will also allow water mergers to be cleared with undertakings from the merging parties sufficient to address any regulatory concerns. Under the revised regime, the CMA retains its position as the sole decision maker in assessing water mergers and the applicable test (whether a merger would prejudice Ofwat’s ability to make comparisons between water companies) remains unchanged. The revised regime does, however, give Ofwat an advisory role in the process requiring the CMA to consider Ofwat’s views as to the likely impact of a merger on its statutory functions.

Following a consultation, the CMA has now issued guidance on its assessment of mergers under the revised regime. Ofwat has similarly published information on its approach to mergers and recently made public benchmark spreadsheets used in the Pennon / Bournemouth water merger (unequivocally cleared last month) which are illustrative of the type of analysis we can expect to see in future merger investigations. The CMA and Ofwat have also jointly issued a statement of intent which sets out the principles to be applied in terms of working arrangements between the CMA and Ofwat going forward.

The new regime clearly offers an opportunity for water companies to increase their customer base, not least when considered against the backdrop of wider water market reform (with full opening of the non-household market from April 2017). Undoubtedly, the old regime by requiring (a lengthy and costly) phase 2 investigation stifled M&A activity in this sector. The recent relaxation of the rules should allow for more speculative water mergers to be tested at Phase 1 and remedies offered without the need for a full Phase 2 review. This could lead to larger water companies looking for bolt-on acquisitions (similar to Bournemouth Water) or more mergers between the smaller water companies. The regime can, however, only take so much consolidation - there will come a point where the CMA decides that Ofwat’s ability to make comparisons is significantly affected: every consolidation reduces this ability by its very nature.