SUMMARY OF
GENERAL UTILITIES PLC AND THE MID KENT WATER COMPANY: A REPORT
ON THE MERGER SITUATION
On 4 January 1990, the Secretary of State
asked us to investigate whether a merger situation had been
created after 11 January 1989 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 Gnrale 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 1.
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.
1 January
1989 is the date on which merger control provisions of the Water Act
19889 (the Water Act) were announced. Section 27 of the Water Act (see
Appendix 1.2) only applies to mergers which arose after that date.
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Last Revised: June 1999
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