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StockBeat: U.K. Utilities Hit By Labour's Nationalization Plans

By Geoffrey Smith

Investing.com -- The specter of socialism is starting to haunt U.K. stocks again.

Water providers Severn Trent (LON:SVT) and United Utilities (LON:UU) are two of the worst-performers on the FTSE 100 as the London market reopened after a public holiday on Monday, thanks to a report on Sunday detailing Labour Party plans to bring them back under public ownership if it wins the next general election.

The Sunday Times cited a briefing paper drafted by senior party officials saying that the entire U.K. water industry should be nationalized. While that’s been official Labour policy since Jeremy Corbyn took over as leader in 2015, the report indicates a willingness to be aggressive in expropriating current owners: the paper suggests compensation for them should be capped at 20 billion pounds. The U.K.’s water regulator Ofwat valued the industry’s assets at 73 billion pounds in its last review.

The water companies, like the U.K.’s energy utilities, were mostly privatized in the 1990s by a Conservative government that promised they would be run more efficiently. According to a study by Friederike Lauruschkus of consulting firm Civity, Britons do indeed pay 30% less than French and German consumers for their water, although she said the U.K. figures are flattered by hidden subsidies.

Moreover, the U.K. still loses almost a fifth of overall supply to leaks, something that sits uncomfortably with the water companies’ record as generous dividend payers.

But nervous shareholders can take comfort from the fact that a future Labour government would face serious financial and reputational costs from the approach outlined in the paper. Aside from the costs, it would likely face lawsuits from Macquarie (AX:MQG), which owns the utility that supplies London (Thames Water), and from Cheung Kong, the owner of Northumbrian Water. Both hold their assets through Hong Kong-based entities, whose ownership rights are protected by an investment treaty.

Severn Trent and Pennon Group (LON:PNN) both fell 2% in early trading while United Utilities fell 1.7%. All later trimmed losses, pulled up by the broader market. At 4:30 AM ET (0830 GMT), the U.K. FTSE 100 was down 0.3%, while the benchmark Euro Stoxx 600 was up 0.1% at 387.14. Germany’s Dax was 0.1% lower, weighed down by disappointing results from BMW (DE:BMWG) and consumer products group Henkel (DE:HNKG_p).

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