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United Utilities Report

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I.   Introduction

The United Utilities is a provider based in England that is engaged into water and waste water services. Its headquarters are in Warrington, the United Kingdom, but it also has the operations in the United States, Philippines, Australia, and Canada. The company serves more than 200,000 businesses and has 3 million households by delivering almost 2,000 million liters a day. In terms of waste water, the company collects it from customers and from stagnant water on the roads after which it treats it and returns it to the environment in a safe state. The company does its business by upholding the highest ethical standards, integrity, and the standards of law. Their business philosophy guides relationships with customers, employees, investors, suppliers and other associates, including the government and regulators. In his Company Analysis: Investment Advice on United Utilities PLC (Fleig, T 2008), the author observed that the company’s activities are centered on four segments of business: licensed multi-utility operations, the business process outsourcing, infrastructure management and telecommunication.

The future of the company is expansive. With the rising effects of a climate change and the challenges of the UK government while providing such essential services like clean water, the firm has great future prospects (Agha et al., 1998). A lot of innovative processes are, therefore, required to tap the future benefits adequately. However, for that to be achieved, the current situation and a bit of the past activities has to be put into the perspective.

Background

It is critical to make a quick observation on the economic factors of the region the company mainly operates on - the UK. The economy of England is among the strongest ones in Europe (Fleig, T 2008). This is illustrated by low rates of unemployment, interest and inflation. In fact, Fleig observed that between 1997 and 2008, the inflation in England remained below 2% as estimated by the government. The rate of inflation has also remained below the Euro average rate starting from the year 2000. These factors have led to the growth of the Gross Domestic Product (GDP) in England. This is the enabling environment for the United Utilities (UU). Indeed, a company with the strong economy is likely to be also powerful.

It is also important in this juncture to outline relative contributions of the company’s four business segments and its revenue. The United Utilities’ Annual Report & Accounts and Form 20-F of 2005 indicated that the Licensed Multi-Utility Operations, Infrastructure Management, Business Process Outsourcing and Telecommunication respectively contributed 54%, 21%, 16% and 9% to the company’s revenue amount (Barlow 2003; Clarke 2003)

Financial Information

This section seeks to investigate and analyze different ratios such as the Liquidity Ratio, Efficiency Ratio, Gearing Ratio, and the Investment Ratio. (Fleig, T 2008) observed that the company’s Current and Quick Ratios were below the average level. It, therefore, means that the company’s liquidity is low. The major question is whether the company has some troubles or whether the low liquidity ratio is because of its efficiency. By looking at the Efficiency Ratio, it shall be noted that the company is above average. Experts speculated that this could have been possible to follow the company’s improved customers’ and inventory management. This high liquidity could have been possible through keeping the average stock and debtor days less than those of the sector. In the same way, the average creditor days are less than the sector days (30 versus 53) (“Hephaestus Books”, 2011). Although this deprives the company of the operation cash, the stronger relationships with creditors are maintained. This also explains why the company’s liquidity ratio is below average as it operates more efficiently, and that the below average Liquidity Ratio does not symbolize any problems.

When the Gearing Ratio is compared with the debt-equity ratio, they are constant. This is due to the governmental close watch since the water business is almost being as a monopoly. Debts are, therefore, highly watched. However, other players have a higher proportion of debts making the United Utilities less risky. By looking at the Investment Ratio, it is realized that the ratio of dividend payouts is high. It means that the company uses its external sources to pay dividends to shareholders. The high dividend payouts have led to the high dividends yield. However, this yield may not last for a long time since the earning per share is below average. In addition, following the high dividend payouts, shareholders are losing their confidence since they are not assured of the sustainability of such payments (Zadek, S 2007).

II.   Industry Analysis

Rivalry among Competing Sellers

According to Fleig (2008), the major competitors are the AWG PLC, Kelda Group PLC, and Severn Trent PLC. However, it should be noted that none of them has exactly the same structure or business segments as the UU; they mostly converge in the water utility segment. The first company focuses on water services and the management of infrastructure, and serves around 5 million domestic clients and the market capitalization of £1,417 million. The Kelda Group PLC has a market capitalization of £2,718 and focuses mainly on the water and waste water activities. Like the UU, it also has the operations outside the UK. The last major competitor, the Sever Trent PLC, also deals with water and waste water services having the operations in the UK, Belgium and the USA. Its market capitalization is £2,506 (“Wikipedia & Books, LLc”, 2010).

The Potential Entry of New Competitors

With the emerging global trend in technology, doing business has become very easy. There is, therefore, a huge possibility of new players entering the already competitive markets, especially in the telecommunications; this is being one of the weakest points of the United Utilities (“Groundwork North-West & Creative Concern”, 2004). The company should, thus, have a very good strategy to deal with these issues when they happen. However, in the water business, the company seems to enjoy a near monopoly advantage. New entrants, in this case, may find this tough since the UK government has its interests in the UU in order to work together while providing an essential gift of water.

Competitive Pressure - Substitute Products

A substitute is a product that can be used instead of another one since it serves the same purpose. In the light of the UU and its industry, it is true that such products exist in different business segments the company has ventured into. In the water and waste water business, some substitute products are offered by other firms. The existence of competitors means the existence of substitutes. There some private firms exist; they are being small, and offer similar services as water and water related services. In most cases, these firms always have very attractive packages not because they have a strong base, but this is some kind of an attempt to establish the one. Such companies like the Kelda Group and the Severn Trent offer similar products to the same market, in the UK, although the UU mostly concentrates on the northwestern region of the country (Richie et al., 1998).

Competitive Pressures - Supplier Bargaining Power

A business venture cannot succeed without suppliers. The UU has them, in the center of its statutes, as a succinct formula of dealing with suppliers (Nichols 2004; “Public Utilities Report, Inc” 2004). It is true that the company can do its components but when the suppliers’ components fail, the clients suffer. The supply of essential materials to the UU may affect a lot of things including the balance sheet and the corporate image. In the business philosophy, the UU wishes to foster long-term relationships with its suppliers and if the core values compliment, it partners with them. Evaluating the suppliers for the best package requires an establishment of good procurement procedures. The United Utilities insists on the contractual responsibility of suppliers into which the clients are not well accepted.

Competitive Pressure - Buyer Bargaining Power

It is usually said that the client always has the last word. It has also been said that when it comes to clients, it does not matter how much you know but it matters how much you care for. In the UK and indeed everywhere, clients have been highly informed. They know what is expected of a service provider; they know their rights and the company’s duties. The business of water raises the serious questions concerning hygiene and the UK is not being an exception. If the UU does not provide what its customer wants, whether external or domestic services, there is a possibility of switching to other service providers. That is why the United Utilities’ business philosophy encompasses customers, in which the delivery of qualitative products is a key component. As a result, the UU has clearly stated its deliberate steps to establish the long term relationships with its clientele. This shall be achieved through the timely delivery of promises, among others (“United Utilities”, 2012).

III.   Company/SWOT Analysis

Strengths

As noted under the competitors’ sub-topic, the UU has more business segments than any of its competitors. While all of them have two segments, the UU has four segments with the Licensed Multi-Utility Operations as the strongest one. It, therefore, experiences the unique synergy effect; if one segment does not do well, others can still correct any negative impacts (“National Research Council (US) Committee on Privatization of Water Services in the United States”, 2002). The other strength lies in the technology development, which can be used across the board to add the competitive advantage not only to different segments but also to the whole company, in general. The company also expects the increased revenue base as the years go by.

Weaknesses

The United Utilities has a lot of expenditures (CapEx) in the water utility segment; it has found itself in hard positions paying to its shareholders. The company’s heavy borrowing for the sake of the dividends’ payments has been estimated to be nearly £100 per year. This may lead to its insolvency in future. Secondly, the communication segment of business makes severe losses following the stiff competition in the market. The notable losses were registered in 2005.

Opportunities

The Infrastructure Management and the Business Process Outsourcing segments have continued to show a good performance especially in 2005. It seems that these segments, with the continued emergence of new contracts, have much potential in propelling the company to the next level. The second opportunity lies in the price adjustments in front of regulators. The regulators, setting the price limits, consider the level of capital expenditures of a company (Jolly, A 2009). Since the UU’s financial ratios are forecast to surpass the regulators’ mark, the prices are likely to be revised upwards; this should be a good thing for the company.

Threats

While the regulators could be the sources of opportunity, they could conversely be the sources of frustration. The regulators revise the prices in water and waste water businesses every five years. Over the time, this has always negatively affected the segments analyzed. It, therefore, becomes difficult to prospect future with certainty. The other threat is competition. The telecommunication and energy sectors have become very competitive. The situation seems to be worsening due to the global trends, and then the industry should be consolidated. There is a likelihood that the environment will be made more favorable even for new entrants (“Icon Group International, Inc. Staff”, 2000).

A summary of strengths, weaknesses, opportunities, and threats (SWOT) has been provided in Table 1.

IV.   Strategic Analysis

The major question is, of course, the best corporate alternative strategy for the United Utilities. An alternative strategy is usually based on a SWOT matrix (Strengths, Weaknesses, Opportunities, and Threats) that considers all strategic factors. Scholars generally agree that the alternative strategies mainly use the company’s strengths to exploit opportunities (SO strategies), exploit the opportunities by overcoming its weaknesses (WO strategies), and use the strengths to avoid threats (ST strategies), or reduce weaknesses and avoid threats (WT strategies).

To begin with, the UU has declared to be more effective while dealing with emerging trends of competition and regulation, especially in the segments of telecommunication and water respectively. The company has also to promote its support businesses which are being not much regulative. This way, the company will be able to support its operations in the tough competition and regulation (Fleig, T 2008). Thirdly, since the telecommunication business is a great loss, it should be divested. A higher focus should be applied to the most profitable sectors or segments of businesses.

V.   Recommendations

It is important for the United Utilities to focus on the thing that are being the best one in. From the statistics, it has been established that the water business is the most profitable one, while the telecommunication business is being among the worst performing segments of business. The company should, therefore, leave the poorly rated segments and focus on the water utility.

The United Utilities liabilities must balance its responsibility to shareholders and clients. The huge capital expenditures are a bad indicator to the company’s future sustainability.

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