Pennon is asking shareholders for £550 million as it adds about £1 billion to planned water-network spending. The plan cuts the dividend per share by roughly 30%, and the shares fell sharply.
The offer is fully underwritten and covers 220.3 million shares priced at 250 pence each. Shareholders are offered seven new shares for every 15 they hold, according to the rights-offer details. Pennon shares fell 17% after the company announced the £550 million raise and a roughly 30% cut to the dividend per share. The offer price is 35.5% to 36% below the theoretical ex-rights price.
Pennon expects to pay about £125 million in total dividends for the current year, down from £138 million. Taking the rights issue into account, the expected payout per share falls to about 18 pence. From that lower base, the company says it intends to increase dividends in line with CPIH inflation. The cut is steep.
The rights issue offers seven new shares for every 15 existing shares, at 250 pence per share.
For investors who own utilities partly for income, the deal has a clear cost. AJ Bell markets head Dan Coatsworth said the cut would disappoint shareholders who look to utility stocks for regular payouts as well as potential capital growth. The income-stock calculation can go either way: McDonald's dividend decision offers a separate example of a company increasing its payout while investors weigh other business pressures. AskTraders estimates the issue will increase Pennon's share count by about 46.7%. The new shares would make up around 31.8% of the enlarged capital. Investors who do not take up their entitlement would be diluted.
A review by new chief executive Keith Haslett identified areas where Pennon needed to improve. The plan includes bringing skills such as leakage technicians back in-house. It would also centralize asset management. Spending would go to assets the company judges need it most. Pennon now expects investment in its regulated water business during the current regulatory period to reach about £3.6 billion, roughly £1 billion more than its original plan. Bloomberg's report on the fund-raising also sets out the larger water-spending programme.
The extra spending is expected to increase the value of Pennon's regulated asset base by more than 40%. It is on top of about £2.6 billion of investment already agreed for South West Water. Pennon said the additional spending should not mean an immediate increase in customer bills. The company is also seeking to recover part of the investment through Ofwat's cost-change process. That recovery is being pursued, but is not guaranteed. Pennon's wider financing plan includes a proposed sale of Pennon Power. The proceeds are intended mainly to reduce debt. The company also aims to keep gearing in its regulated businesses at or below 65%. Yahoo Finance UK reported those financing aims. Jefferies described the package as a substantial balance-sheet restructuring.
South West Water was recently handed a record £7.9 million fine over repeated sewage discharges. Pennon's new chief executive Keith Haslett linked the investment plan to improving outcomes for customers and local communities.
A rights issue raises money from existing shareholders and increases the number of shares. That changes the per-share dividend figure: the total payout and an individual investor's income can tell different stories. The difference matters. Pennon is asking investors to accept lower near-term income while it pays for network upgrades. Some costs may be recoverable through regulation, but that is not certain. For an income-focused stock, the trade-off is demanding. The 17% fall shows the market's immediate response. The investment plan now has to justify the burden through better assets and execution.
