Scottish Power, the Spanish-owned energy supplier, and larger rival Ovo Energy have initiated preliminary discussions about a potential merger that could result in a company catering to over six million British households. Executives from Iberdrola, the parent company of Scottish Power, and Ovo have been in talks in recent weeks. The discussions are in the early stages, and any formal agreement would likely take several months to materialize, if at all. If the merger between the two companies’ residential gas and electricity operations goes ahead, it would position them as the third-largest supplier in the market, following behind Centrica-owned British Gas and Octopus Energy. Ovo, with 4 million customers, would likely be the acquiring entity, with Iberdrola potentially contributing funds and retaining a stake in the combined entity.
Scottish Power currently serves around 2.4 million households. In parallel to these discussions, Ovo is also exploring the possibility of raising approximately £300 million through the issuance of new shares. Financial investors have been approached by Rothschild, the investment bank advising Ovo, regarding this opportunity. A year ago, Ovo had engaged Rothschild to explore various options, including bringing in new investors or pursuing a sale, marking a strategic move by the company to challenge the industry’s oligopoly.
Ovo, founded by Stephen Fitzpatrick in 2009, has positioned itself as a challenger brand offering superior service compared to established players in the energy sector. The company’s pivotal moment came in 2020 when it acquired the retail supply arm of SSE, propelling it to the forefront of the British energy market. Ovo’s growth trajectory has encountered challenges, particularly concerning its relationship with regulatory bodies like Ofgem and a surge in customer complaints related to overcharging.
Justin King, former J Sainsbury chief and current chairman of Ovo, has prioritized rebuilding regulatory relationships within the company. The recruitment of David Buttress, formerly Boris Johnson’s cost-of-living tsar and ex-CEO of Just Eat, as Ovo’s chief executive underscores the company’s commitment to navigating these challenges. The performance of Ovo’s technology platform, Kaluza, will play a pivotal role in its long-term valuation. Kaluza, designed to license software to other energy suppliers and offer customers smart electric vehicle charging and heat pumps, attracted significant investment interest, with AGL Energy acquiring a 20% stake at a valuation of $500 million (£395 million).
In addition to its core energy business, Ovo has ventured into the electric vehicle car charging sector under the Charge Anywhere brand, expanding its network of public charging points across the UK. Iberdrola’s acquisition of Scottish Power in 2007 valued the company at over £11 billion. Notably, the UK’s energy price cap is set to decrease by 7% to £1,720 per year, following an announcement by Ofgem. Both Ovo and Scottish Power have chosen not to comment on these developments.
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