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Mayfair And Morgan Stanley Raise Stake In UK Gas Supplier Despite Profit Slump

  • Long-standing partners Mayfair Equity Partners and Morgan Stanley Investment Management have increased their stakes in Ovo Group.
  • CEO of Ovo's retail division, Raman Bhatia, states that the company is poised to create more value for its customers by investing in decarbonization technology and services.
  • The profit decline is blamed on rising energy costs and volatile gas prices, reflecting instability in commodity markets since the post-pandemic demand surge and supply squeeze.
Natural Gas

Ovo Group (Ovo) shareholders have raised their stakes in the company in transactions worth £200m, which has been announced the same day the company revealed a hefty downturn in profits amid higher hedging costs for buying gas.

Long-standing partners Mayfair Equity Partners and Morgan Stanley Investment Management have both increased their holdings in the owner of the UK’s fourth-largest energy supplier by an undisclosed amount – buying shares from existing investors.

Both groups have backed Ovo Group since 2015, alongside a handful of investors including Mitsubishi Corporation, which took a 20 per cent stake four years ago.

Raman Bhatia, chief executive of Ovo’s retail division, argued the investment highlighted the company’s “potential for growth” as the company grows and innovates, despite challenging market conditions as the sector recovers from the energy crisis which saw 30 suppliers collapse.

He said: “We are in a solid position to create further value for customers, with a focus on continuing to invest in the technology and services that customers really need to decarbonise their homes.”

The latest investment news was unveiled alongside a slump in profits, with Ovo confirming that earnings before tax nosedived 90 per cent to £20m for the full-year ending December 2022, a sharp decline from £159m in 2021.

However, the company expected this to have “no cash impact” and “will reverse in future periods when customers use this energy”.

Ovo blamed the decline in profits on the rising cost of energy it was buying in advance to meet its supply commitments for customers – known as hedging – due to highly volatile gas prices.

Such a downturn in earnings exposes the historic instability in commodity markets which energy firms have been wrestling with since post-pandemic demand and a Kremlin-backed supply squeeze on Europe saw gas prices soar well beyond conventional trading norms.

Dozens of energy firms collapsed between late 2021 and early 2022, exposed by a lack of hedging, including the de-facto nationalisation of Bulb Energy for nearly a year, which was home to 1.6m customers.

Russia’s invasion of Ukraine saw gas prices rise to record levels, reaching nearly £8 per therm on UK benchmarks, and while markets have since eased, suppliers are still facing higher costs to meet hedging requirements.

Questions over Ovo’s future were raised last year, with The Financial Times reporting that Ofgem had begun contingency measures including its potential nationalisation amid concerns over its financial vulnerability.

This also followed last year’s filings to Companies House, when Ovo warned there was “a material uncertainty that may cast significant doubt on the company’s ability to continue as a going concern”.

That is no longer expected to be the case, as in its latest financial report, the company revealed it expects to “be compliant with financial covenants” even under a further increase in bad debts.

Bhatia told City A.M. earlier this year supplier plans to “have a long run” and is focused on its mission to “to help customers on to the path to net zero.”

Ovo also paid no dividends during the year, with Ofgem chief executive Jonathan Brearley warning suppliers this month in an open letter not to pay out to shareholders unless they are financially stable.

By Nicholas Earl via CityAM

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