Image: Ovo.

Image: Ovo.

OVO Energy is to acquire SSE’s energy supply division in a £500 million deal.

The transaction, which comprises £400 million in cash and an additional £100 million in loan notes, is to complete either later this year or early next pending regulatory approvals.

If the deal completes as expected, OVO would become the second-largest energy supply company in the UK with in excess of 6.7 million customers, second only to Centrica’s British Gas unit.

Stephen Fitzpatrick, chief executive and founder at OVO, said the deal marked a “significant moment for the energy industry”.

“Advances in technology, the falling cost of renewable energy and battery storage, the explosion of data and the urgent need to decarbonise are completely transforming the global energy system.

“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.

“SSE and OVO are a great fit. They share our values on sustainability and serving customers. They’ve built an excellent team that I’m really looking forward to working with.”

It marks SSE’s withdrawal from a UK supply market it has been attempting to retract from for some time. The company was originally intending to spin-off the division and merge it with innogy’s npower, only to see that deal fall through when Ofgem’s price cap moved the financial goalposts too far for either firm to commit.

SSE was then vocal about its ambition to move the division on, either via a straight sale or spin-off and de-listing. Last month SSE confirmed industry rumours that it was in discussions with OVO, but stressed no deal had yet been agreed.

Confirming the agreement to the market this morning, SSE said it would do all it can to ensure a smooth transition for both customers and employees in the event of a successful completion.

“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.

“OVO shares our relentless focus on customer service and has a bold vision for how technology can reshape the future of the industry. I’m confident that this is the best outcome for the SSE Energy Services business,” Alistair Phillips-Davies, chief executive at SSE, said.

Analysis: Liam Stoker, editor in chief, Current±

This kind of transaction has been a long time coming for OVO Group, a company firmly on many in the industry’s radar for a while now. Stephen Fitzpatrick’s ambition has been matched by OVO’s meteoric growth and, now, the company is no longer punching up at the Big Six but sits alongside them.

How OVO handles that transition from challenger to mammoth will be of utmost importance. It’s difficult to undersell the task at hand, given that OVO’s customer base will effectively increase six-fold in such a short space of time. That transitional services agreement in the contract could prove a smart move, but many companies before OVO have mishandled similar transitions and paid the price.

And let’s not forget, in acquiring SSE OVO is still bringing in a company that isn’t exactly in the rudest of health. This is a company that in February issued a profit warning amidst Capacity Market woes and just three months later was eyeing up 400 redundancies. While it’s not as bad as the npower’s of this sector, when you also consider just how difficult other large incumbents have found the energy retail market in the last few months, OVO will have plenty of thinking to do.

OVO has indeed been on the industry’s radar for some time. That won’t change with this acquisition, but it may be for different reasons.

SSE further said it would use the cash proceeds from the deal to reduce the company’s net debt, however, £59 million is to be deducted from the total cash consideration owed to SEE to reflect SSE Energy Services’ debt items, including accruals in respect of payments owed under the still-suspended Capacity Market mechanism.

All of SSE’s ~8,000 employees will now transfer to OVO, and both firms have agreed upon a transitional services agreement which will see SSE provide certain services to OVO throughout a post-transaction period.

The two firms have also agreed a brand licensing agreement, which will see the SSE brand remain active in the energy supply market while it is being migrated to OVO ownership