11 June 2015

CMA refers the Bournemouth Water and South West Water merger for Phase 2 investigation

On 8 June 2015, the UK’s Competition and Markets Authority (CMA) confirmed that it has referred the completed merger of Bournemouth Water with South West Water (owned by Pennon Group plc) for an in-depth Phase 2 investigation.  Pennon Group plc acquired Bournemouth Water for £100m at the start of April 2015.  The CMA has referred the merger for a Phase 2 investigation because it believes the relevant turnover thresholds have been met under the UK’s special merger regime for the water sector.

Since the start of the privatisation process in 1989, the UK water sector has been subject to a special merger regime in order to protect consumers.  Unlike the normal merger regime, which regulates only those mergers which the CMA believes may substantially lessen competition, water mergers have always been automatically referred for a Phase 2 merger investigation before the CMA.  Under the Water Industry Act 1991 the CMA has a duty to make an automatic reference for a Phase 2 investigation if it believes that it is or may be the case that a merger of any two or more water enterprises has taken place and (i) that the value of the turnover of the target water company exceeds £10 million; and (ii) that the acquiring firm already owns water companies that each has turnover exceeding £10 million.  

Significantly, the special merger regime for the water sector will be changing in due course when section 14 of the Water Act 2014 comes into force.  Section 14 gives the CMA a degree of discretion when considering whether a Phase 2 investigation is necessary for a particular qualifying merger, displacing the current mandatory process.  One of Parliament’s aims in creating this new regime is specifically to reduce the number of mergers referred for Phase 2 investigation because those investigations are seen as a disincentive to potentially beneficial mergers.      

The CMA had made an initial enforcement order to Pennon Group plc in relation to the merger on 22 April 2015.  In the Phase 2 investigation the CMA will consider in particular whether the merger will hamper Ofwat’s comparative regulatory approach.  The CMA is due to complete the investigation by 20 November 2015.

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