By Susanna Twidale and Noor Zainab Hussain
LONDON (Reuters) - Relative newcomer OVO Energy is set to become one of Britain's Big Six energy suppliers after striking a 500 million pound ($622.65 million) deal to buy SSE's <SSE.L> retail arm, announced on Friday.
The 10-year old independent company has flourished in a market which has seen more than ten small energy suppliers collapse over the past year, hurt by fierce competition and a regulator-imposed cap on prices.
"Our focus was always to deliver cheaper, greener, simpler energy and provide good service for customers," OVO Chief Executive and founder Stephen Fitzpatrick said in an interview.
SSE had been looking for a buyer for its retail arm following a failed merger with Innogy, which collapsed after the companies failed to agree on new commercial terms in light of a government cap on energy bills.
Amid fierce competition from smaller, nimbler rivals who were often able to offer cheaper prices, SSE's retail arm struggled to retain customers. Operating profit at the division fell 68% in the year to March 2019.
SSE's retail energy business is one of the "Big Six" in the British market, supplying energy and related services to around 3.5 million household customers.
With its existing customers OVO will be supplying 5 million homes once the deal concludes. Britain's largest energy supplier is Centrica's <CNA.L> British Gas with around with around 7.2 million UK energy supply customers.
Fitzpatrick set up OVO in 2009 after a successful five years on the trading floor. His aim was to make enough money to set up a new business, he said, and focused on energy because he saw the sector was ripe for a shake-up.
He said the firm had been the first in Britain to supply its customers with coal-free electricity, adding that its focus on new technology, such as smart chargers for electric vehicles, has set it apart from rivals.
OVO grew steadily at first, but found a catalyst for rapid expansion earlier this year when Japan's Mitsubishi Corporation <8058.T> took a 20% stake in a transaction valuing OVO at around 1 billion pounds.
"We picked up the phone to SSE within a week of that deal," Fitzpatrick said.
SSE'S NEW FOCUS
SSE shares were buoyed by the deal, and hit their highest in over four months after the announcement. The stock was 1.2% higher at 1,180 pence by 1104 GMT.
"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," Bernstein analysts said.
Proceeds from the sale, which involves 400 million pounds in cash and 100 million pounds in loan notes, will be used to reduce SSE's net debt, the company said on Friday.
The deal is expected to be completed in late 2019 or early 2020, subject to regulatory approvals. All of SSE Energy's near 8,000 employees will transfer to OVO, SSE said.
Jefferies analysts said the disposal represents an important step forward in SSE's strategy to re-orientate the business towards networks and renewables.
The deal also comes after the company kicked off the process to sell its 140 million cubic feet per day portfolio of North Sea gas fields in a single package, a sale document seen by Reuters showed last month.
Britain's other four Big Six suppliers are Iberdrola's <IBE.MC> Scottish Power, Innogy's npower, E.ON <EONGn.DE> and EDF's <EDF.PA> EDF Energy.
($1 = 0.8096 pounds)
(Reporting by Susanna Twidale in London, Noor Zainab Hussain in Bengaluru; Editing by Arun Koyyur, Keith Weir and Jan Harvey)