Ofwat may want to supply better evidence of being tough on water firms

·4 min read
<span>Photograph: David Gray/Reuters</span>
Photograph: David Gray/Reuters

Ofwat is not a complete patsy and is in the business of holding companies to account, the chief executive of the water regulator argued on the Today programme on Tuesday. David Black even waved a metaphorical big stick at a couple of firms. “I think that companies like Thames and Southern really need to up their game,” he said.

He described Thames as “a repeated poor performer”. And he said Ofwat’s £126m penalty on Southern in 2019 for wastewater and reporting breaches was instrumental in forcing a change of ownership last year. “That’s an example of a company that performed poorly, that was held to account by Ofwat and the investors lost their shirt,” argued Black. “That is exactly as it should be.”

What this breezy accounted omitted to mention, however, was that the Ofwat-approved rescuer of Southern Water was none other than Macquarie, the giant Australian financial outfit whose ownership of Thames from 2006 to 2017 was characterised by supercharged debt financing, heavy dividend extraction, missed leakage targets and a major sewage-dumping prosecution. Even Ofwat seemed to cheer when Macquarie left the capital; its chairman at the time called on the new owners to make “a step-change” in the way Thames “operates and behaves”.

The decision to welcome back Macquarie at Southern, which serves 4.7 million people in Kent, Sussex, Hampshire and the Isle of Wight was therefore mystifying. The justification given was that Macquarie came bearing good intentions and a much-needed capital injection of £1.07bn. Possible translation: Southern was in such a financial mess that any rescuer, whatever its previous record in the sector, was better than none. If so, that is not what most observers would describe as life proceeding “exactly as it should be”.

Cut-price retailer

Back in March, the board of Ted Baker rejected takeover proposals at 130p and 137.5p a share, saying they “significantly undervalued” the fashion retailer. Five months later, and after laborious on-off talks with various parties, the directors are rolling over at 110p and declaring that “fair value” has been achieved for shareholders by submitting to a bid from US firm Authentic Brands. As a piece of negotiation, it’s a shocker.

It may also be a pragmatic concession. If half the shareholder base, including founder Ray Kelvin with his 11.5% stake, wish to take the cash, the board is in no position to resist. Besides there’s the small matter of “the uncertain economic environment”, as chair Helena Feltham put it. Yes, the consumer weather has taken a turn for the worse since March.

All the same, submitting to a lowball £211m offer from a US turnaround merchant is a lacklustre way to bow out. Ted Baker was never a retailing powerhouse, but, in his day, Kelvin had carved out an interesting niche in the market. Profits warnings, accounting tangles and the “forced hugs” affair that forced his exit in 2019 changed the picture obviously, and then Covid arrived. But a recovery of sorts seemed to be under way.

One can only assume the big shareholders, led by Toscafund and Schroders, are terrified about the possible impact of those economic uncertainties. They may be right to be so.

Another net gain for the US?

Farewell Darktrace, then? We hardly knew you, let alone understood how those cybersecurity tools work.

Well, the takeover approach from US private equity firm Thoma Bravo isn’t yet a formal offer, so it’s too soon to say Darktrace’s 15 months as a quoted company in London are drawing to a close. But the 24% leap in the share price says the market is betting the way.

At 515p, producing a value of £3.4bn, the share price has doubled since flotation. On the other hand, the peak was almost £10, which shows how hard it is to value high-growth, loss-making firms in whizzy fields like cybersecurity.

The other complication, of course, is Darktrace’s links to shareholder and early backer Mike Lynch, the Autonomy founder fighting extradition to the US on fraud charges, which he denies. The company’s listing in London seemed to be partly driven by a desire to demonstrate independence from Lynch but has never fully achieved that goal. As a multiple of revenues, Darktrace’s value lags foreign peers’. Therein lies a possible opportunity for a bidder to benefit from a clean break.

Assuming, that is, UK ministers don’t throw a few obstacles in the path of yet another US tech takeover. One assumes they won’t, but it’s not impossible.