Two of Ovo Group’s (Ovo) largest shareholders have raised their stakes in the company with 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. Contact online >>
Two of Ovo Group’s (Ovo) largest shareholders have raised their stakes in the company with 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 backers 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 invested in Ovo Group since 2015, and are among a handful of shareholders including Mitsubishi Corporation, which took a 20 per cent stake four years ago.
Following the announcement, Stephen Fitzpatrick, the billionaire founder of Ovo, now has a reduced stake in the business – although its exact size has not been shared publicly.
However, Raman Bhatia, chief executive of Ovo''s retail division, argued the investment highlighted the company''s "potential for growth" as it 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."
But 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 then saw gas prices rise to record levels, reaching nearly £8 per therm on UK benchmarks.
While markets have since eased, suppliers are still facing higher costs to meet hedging requirements.
Questions over Ovo''s future were raised last summer, 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".
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.
Big Six energy supplier Ovo has cut ties with its long-standing parent company Imagination Industries, with founder Stephen Fitzpatrick shifting the household retailer into a new corporate entity.
Ovo Group revealed in its results last week the company has been transferred to Energy Transition Holdings, with Fitzpatrick the majority shareholder alongside long-term backers Mayfair Equity Partners, Mistubishi Corporation and Morgan Stanley Investment Management.
The decision was overshadowed by a £200m investment boost from Mayfair and Morgan Stanley, and a slump in profits from £159m in 2021 to £20m in 2022.
Fitzpatrick’s latest move could ease some of the scrutiny on his business decisions, with the Ovo boss grilled by the Business, Energy and Industrial Strategy Committee last year concerning brand licence fees and loans to directors.
This includes £21m in brand licence fees Ovo paid to Imagination according its 2020 accounts, and its decision to hand out £27m in loans to its directors amid the global energy crisis – as first reported by The Mail on Sunday.
Imagination was originally set up as Fitzpatrick’s investment vehicle to incubate companies in the early stages.
Once investments rise in scale they are spun out of the group, with Ovo’s exit following the listing of Vertical Aerospace in December 2021, which was also part of Imagination.
Fitzpatrick founded Ovo in 2009, which has since risen to become the UK’s fourth largest supplier with over 4m customers.
It expects the slump in profits to have "no cash impact” on its business, blaming the decline on the need to hedge supplies for customers in a volatile trading period.
The supplier also expects to "be compliant with financial covenants,” with chief executive Raman Bhatia committed to the domestic energy sector.
Ovo has been linked to a potential takeover of Shell’s household supplier arm, home to 1.5m customers, which was put up for sale by the energy giant earlier this year – which it has declined to comment on.
Ovo Group shareholders have invested an extra £200mn into the owner of Britain''s third-largest energy supplier following a "challenging" year for the sector in which the company''s profits shrank 90 per cent.
The company said on Friday that Mayfair Equity Partners and Morgan Stanley Investment Management had increased their stake by an undisclosed amount.
Raman Bhatia, chief executive of Ovo''s retail division, said the backing showed the company''s "potential for growth" despite challenges in the market following last year''s energy crisis.
Ovo Group, whose retail arm supplies energy to about 4mn households, made adjusted earnings before interest, tax, depreciation and amortisation of £20mn in the year ending December 2022, down from £159mn in 2021, according to accounts published on Friday.
However, its unadjusted results showed a swing from a £335mn profit in 2021 to a £1.3bn loss in 2022.
It put most of this down to a change in the value of energy it had bought in advance to hedge its supply commitments, while saying this had "no cash impact" and "will reverse in future periods when customers use this energy".
The figure highlights the huge volatility in commodity markets that suppliers have grappled with since gas prices started surging in summer 2021 as Russia started squeezing supplies to Europe in the run-up to its invasion of Ukraine.
The market disruption triggered the collapse of 30 energy suppliers in late 2021 and early 2022, and forced the government to step in to subsidise all household energy bills between October 2022 and the start of this month.
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