The Octopus takeover of Bulb is the subject of a legal challenge

The Octopus takeover of Bulb which was announced in November is now subject to a legal challenge from a group of the company’s rivals who argue that it received preferential treatment from the Government. Bulb collapsed in November 2021 and was placed into Special Administration, to avoid imposing the costs of failure onto consumers at a time when they were already struggling with high prices – although the costs of the Special Administration will also be recovered from consumers, there is more flexibility over the timing than through the regular Supplier of Last Resort (“SOLR”) regime.

British Gas, E.On and Scottish Power have applied for a judicial review of the sale of Bulb to Octopus, saying the company benefited from “hugely advantageous” terms in securing the deal. In a hearing on 27 January, the applicants demanded scrutiny of the sale process arguing a lack of transparency over the process and the terms of the deal between Octopus and BEIS. A judicial review will now take place over three days, starting on 27 February. MPs have also called for greater transparency over the process after rivals claimed that Octopus effectively received a “cash gift” or “dowry” in relation to Bulb calling it “a mess-up worth billions” for taxpayers.

“This issue is of central importance in circumstances where Octopus has been the beneficiary of hugely advantageous arrangements which were not offered to other participants in the sale process, in particular BGT,”
– British Gas

In court documents, British Gas Trading (“BGT”) argued that its analysis of evidence submitted during the discovery process suggests Octopus had discussed the possibility of the Government providing support for the deal earlier than originally stated by Octopus, accusing it of failing to “comply with its duty of candour in respect of a critical part of the sale process”.

“This court case looked vexatious to begin with, but now it’s clear that the government is likely to make a profit on the sale of Bulb to Octopus, this legal action looks even more desperate and the judge has rejected their fishing expedition in its entirety…Maybe if they focused on looking after customers instead of expensive court cases, they wouldn’t have won a wooden spoon for the worst service of any company in any sector, while Octopus is Which? recommended for the sixth year in a row,”
– Octopus Energy

Unsurprisingly, Octopus Chief Executive, Greg Jackson, has insisted it was a “fair deal for taxpayers” and has hit back at the claims, labelling his rivals as “desperate”.

What do we really know about Octopus Energy?

These calls for transparency are not surprising if you look closely at Octopus, its legal structure and its financial performance. Octopus has just filed its accounts for the year ending 30 April 2022, and they make for interesting reading.

First of all, who owns the company? This is important, because the business appears to be insolvent and relies on shareholder support for liquidity. According to data held at Companies House, Octopus Energy Limited has one “person” with significant control: Octopus Energy Group Limited which owns more than 75% of the company. Octopus Energy Group Limited in turn has one person with control, holding between 25% and 50% of the shares: Octopus Energy HoldCo Limited. In the past, this entity listed Keith Jackson and James Edison as having between 25-50% of the shares. Octopus Energy HoldCo Limited has one entity with more than 75% of its shares: Oe Holdings Limited, a company which was only incorporated in March 2022, which filed two different sets of governance documents (Memorandum and Articles of Association) during 2022. Oe Holdings Limited has no person with significant control.

According to the Octopus Energy Group Limited accounts, the shareholders at 30 April 2022 were:

• Octopus Energy HoldCo Ltd – 39.07%
• Octopus Capital Ltd – 0.58%
• Origin Energy International Holding Pty Ltd – 16.49%
• Tokyo Gas UK Ltd – 7.48%
• GIM Willow (Scotland) LP – 8.97%
• Canadian Pension Plan (CPP) Investment Board – 2.99%
• Management & employees via Octopus Nominees Ltd – 24.4%

Origin Energy International Holding Pty Ltd is owned by Origin Energy Limited, an Australian integrated energy company.

Prior to 25 October 2022, Octopus Energy HoldCo Ltd’s controlling shareholder was Octopus Capital Limited which provided a parent company guarantee for the financial year ending 30 April 2022. In its accounts for that same financial year, Octopus Capital Ltd lists a £40 million revolving credit facility which it provides to Octopus Energy Limited. Elsewhere in the Octopus Capital accounts, it mentions that it now holds an “associate investment” in Octopus Energy Group.

Octopus Capital Limited has three main business areas: Financial Services (Ventures, Real Estate and Renewables), Energy, and Education. In 2022 it de-consolidated Octopus Energy Ltd after selling a stake to Generation Investment Management (“GIM”) and at this point deemed that it lost control of the company since its equity ownership had fallen below 50%, key decision-making for on-going operations and share transactions require the consent of all significant shareholders and “the Group does not have a majority of board members”. (I believe the word “Group” in this instance should be with a lower case – these are company, not group accounts and elsewhere “group” is referenced as a “group of entrepreneurially minded businesses”. The term “Group” appears regularly in the report but does not seem to be defined.)

Since October 2022, Octopus Energy HoldCo Ltd’s controlling shareholder was Oe Holdings Ltd, which has no controlling shareholder of its own. Of course, Oe Holdings does have shareholders, but according to the information held at Companies House, no-one has overall control – several individuals or entities will hold minority stakes. While this is not suspicious or an indication that anything incorrect is going on, it makes it more difficult to understand exactly who controls the business and, importantly, whether the shareholders whose support underpins the going concern assessment of the business will truly support Octopus Energy Ltd over the long term.

The Octopus Energy business is on financially shaky ground

It is fair to say that Octopus Energy Ltd has survived so far on the basis of continued funding from its shareholders, without which the business would not be viable. The company lost £161.6 million in 2022 compared with £1.5 million the previous year, despite doubling its revenues and adding more than a million new customers. It also re-stated its 2021 accounts which as originally filed showed a £25.0 million net profit and now show a £1.5 million net loss. The reasons for the re-statement, buried in Note 17 to the accounts, were an under-statement of the cost of sales of £15.8 million, as well as under-accruals of £9.3 million for the Renewables Obligation and £7.6 million for Renewable Energy Guarantees of Origin (“REGOs”). These increased the 2021 cost of sales by £32.6 million, pushing the company into a loss for 2021 (corporation tax fell as a result by £6.2 million).

“We could have made a profit, but now’s not the time — instead we chose to absorb £150 million of escalating costs on behalf of customers through prices and support funds, debt-forgiveness and increased service,”
– Greg Jackson, CEO of Octopus Energy Ltd

Octopus claims that its loss in the year to April 2022 was a choice due to deciding to absorb £150 million of wholesale costs in order to keep prices down or consumers, but this is not some heroic act – it is a run-of-the-mill growth strategy: sell cheaply in order to secure market share.

Octopus Energy Group Ltd lost £141.0 million  in 2022, compared with £64.7 million in the year to April 2021. Octopus Energy HoldCo Ltd was exempt from filing financial statements, and Oe Holdings Ltd has not been around long enough to file any accounts. Octopus Capital Ltd is also loss-making, losing £4.8 million in 2022 compared with £53.3 million in 2021.

Origin Energy invested £125 million in Octopus Energy Ltd in 2020 to support continued growth, with a further £37 million in the year to April 2022 and £94 million since that date. Tokyo Gas invested £150 million in 2021, a further £45 million in 2022 which may be earmarked for an agreed joint-venture in Japan. GIM has committed a further £23 million for 2023 while CPP Investment Board has committed a further £106 million for 2023.

These commitments and the funding already received from Origin Energy for 2023 total £233 million which would cover the company’s losses for the year assuming they were in line with the previous year, along with the £40 million RCF with Octopus Capital. Octopus Energy also raised capital through factoring the receivables associated with its SOLR appointment to the customers of Avro, amounting to £633 million in May 2022.

There is a lengthy comment regarding the going concern preparation of the accounts in the Octopus Energy Ltd Annual Report, including:

The full going concern statement is much longer, and does have a hint of protesting too much. Fundamentally, Octopus Energy is making increasing losses year after year, and is only able to continue to operate on the basis of cash injections, a parent company guarantee and these interesting, uncollateralised hedges.

It would be helpful to know who provides these collateral-free hedges: this is not normal in the market, and a requirement to start posting collateral could hurt the company a great deal. It is also no surprise that Octopus has pushed back strongly against Ofgem’s moves to require companies to ring-fence Renewables Obligation and customer credit balances.

So far, it appears that Octopus Energy’s shareholders are willing to pour in cash in the hope of securing a significant share of the GB retail market, but at some point that market share will need to translate into profits. The company is clearly adept at raising cash (as well as self-publicity), but it is not unreasonable to wonder at what point some of these investors would lose patience. The tone of the Octopus Capital accounts suggests it is distancing itself from its energy supply venture, and while new money appears to have been readily available, a lot will depend on whether Octopus can convert its growth into profits.

Even without the legal challenge, the digestion of Bulb will be a major test for Octopus. It is no wonder that rivals are wondering how this all adds up, and how Octopus came to be awarded the Bulb business. The hearings later this month may prove to be quite interesting!