SUMMARY OF
SOUTHERN WATER PLC AND MID-SUSSEX WATER COMPANY: A REPORT
ON THE MERGER SITUATION
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 1.
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.
1
11 January is the date onwhich the merger control provisions
of the Water Act 1989 were announced. Section 29 of the Water Act only
applies to mergers which arose after that date.
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Last Revised: June 1999
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