Does This Deal Point The Way Forward For Centrica PLC And SSE PLC?


Fast-growing mid-cap utility reseller Telcom Plus (LSE: TEP) has announced the £218m acquisition of two energy companies from nPower, in which it formally takes ownership of 770,000 gas and electricity customers. nPower, one of the UK’s ‘Big Six’ energy suppliers, claims the deal “is good for competition and good for consumer choice”, with its CEO saying it showed Britain was “well on the way to a Big Seven rather than a Big Six”.

Stranger and stranger

Companies don’t normally boast about facing increased competition — but these are not normal times, with the energy companies under fierce attack from politicians of all hues. Scratch the surface of the deal and all isn’t what it seems.

Telcom is buying back companies that it sold to nPower in 2006 in order to eliminate its exposure to volatile wholesale energy prices. Telcom continued to manage the customer relationships under a service contract and customers continued to see Telcom’s ‘Utility Warehouse’ brand.

Why is nPower selling the companies back now? Under the Retail Market Review, firms will be limited to four tariffs: if nPower were to keep these companies then their customer tariffs would count against its limit.

It’s a moot point how much the change back of ownership increases competition. As the stock exchange announcement helpfully describes, ‘there will be no material change in the responsibilities of either party’.

A new model — or smoke and mirrors?

This could be a model of how the industry might evolve. In reality there would still be six big energy providers, but they would sell to the public through a multitude of resellers. That would lower the public profile of the Big Six and make them less vulnerable to attacks from vote-hungry politicians, without fundamentally changing the economics of the industry.

Reducing political risk would be good news for investors in Centrica (LSE: CNA) (NASDAQOTH: CPYYY.US) and SSE (LSE: SSE) (NASDAQOTH: SSEZY.US). Similar deals would see them divesting the customer relationship and billing part of their business but remaining vertically integrated. Both companies say wholesale and retail businesses are a natural hedge for each other.

Telcom claims to be the UK’s only fully integrated provider of home phone, mobile, broadband, gas and electricity, though over 80% of last year’s revenues came from energy. It says it runs customer billing more efficiently than the Big Six. If the reselling model takes off in scale, other billers-and-bundlers could get interested… would you buy your gas from BT or Vodafone?

Political risk

Investors in UK companies had almost forgotten about political risk until Labour leader Ed Miliband dropped his bombshell a couple of months ago. It highlights that risks can come from any direction at any time. The best defence is to have a diversified portfolio of quality stocks. Shares such as those described in this report from The Motley Fool. It tells you about five of the most robust companies on the market today.  Just click here to download and read it -- it's free.

> Tony owns shares in Centrica, SSE and Vodafone but no other stocks mentioned in this article. The Motley Fool has recommended shares in Vodafone.