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SSE to sell retail energy business to challenger Ovo in £500M deal

SSE PLC, one of Britain's largest utilities, has agreed to sell its energy supply business to upstart challenger Ovo Group Ltd in a deal worth £500 million, completing a drawn-out retreat from the country's retail market.

The transaction will see SSE Energy Services Group Ltd. and its around 8,000 employees transferred to OVO Energy Ltd for £400 million in cash. Once the deal is completed, Ovo will also issue £100 million in loan notes to SSE, which will be due for repayment in 2029 and carry an annual interest rate of 13.25%, making for an overall enterprise value of £500 million.

The companies said they expect the sale to close in late 2019 or early 2020, subject to regulatory approvals. SSE will use the proceeds to pay down debt, it said.

The deal will catapult Ovo Energy to the forefront of Britain's retail energy market, serving almost 5 million households. Its combined market share of 18% will be second only to the 19% served by Centrica PLC subsidiary British Gas PLC.

For SSE, the sale completes a long planned divestment process. The company has been trying to offload its retail business since last year, when an agreement with Germany's innogy SE to combine and spin off both companies' British household units fell through at the last minute. SSE confirmed it was in talks with Ovo in August.

The company wants to focus on renewable generation and regulated energy networks, although it will still supply energy to business customers in Britain and to business and household customers in Northern Ireland and Ireland after the deal.

"We have long believed that a dedicated, focused and independent retailer will ultimately best serve customers, employees and other stakeholders — and this is an excellent opportunity to make that happen," SSE CEO Alistair Phillips-Davies said in a statement. SSE's share price was up by 1.16% to 1,179.50 pence in early trading in London.

Deepa Venkateswaran, an analyst at Alliance Bernstein, said the £500 million price tag was double what had been expected for the deal and compares to a book value of £764 million.

"We see this deal as positive for SSE as it gets rid of a business unit which has been a drag on the overall group and helps to refocus attention on the core business of networks and renewables," she said, adding that SSE was expected to win big in the U.K.'s ongoing offshore wind auction.

Ovo, founded in 2009, had already been one of the fastest-growing among a number of upstarts making life more difficult for Britain's Big Six energy suppliers, which also include companies owned by E.ON SE, Electricité de France SA and Iberdrola SA's Scottish Power.

Their combined electricity market share has fallen to around three quarters as dozens of smaller challengers with lower cost bases have siphoned off customers. This year, a price cap on the most expensive tariffs has further cut into profits. Operating profits for SSE's household unit totaled £35.3 million for the last financial year, down from £221.8 million in the previous year.

Meanwhile, Ovo said it increased its U.K. customer base by 50% to 1.5 million customers last year. It has started operating in France and Spain and wants to expand to Australia, Germany and Italy next year. The company sold a 20% minority stake to Mitsubishi Corp. in February to finance its growth plans, which also include electric vehicle charging and energy storage division Kaluza.

"For the past three years Ovo has been investing heavily in scalable operating platforms, smart data capabilities and connected home services, ensuring we’re well positioned to grow and take advantage of new opportunities in a changing market," the company's founder and CEO, Stephen Fitzpatrick, said in a statement.

Credit Suisse and Morgan Stanley acted as SSE's joint financial advisers and corporate brokers on the transaction.