Scottish Power, the Spanish-owned energy supplier, and larger rival Ovo Energy have begun holding exploratory talks about a merger that would create a company serving more than 6 million British households.
Sky News has learnt that executives from Iberdrola, which owns Scottish Power, and Ovo have been engaged in preliminary discussions in recent weeks about the possibility of a deal.
The talks are at an early stage and any formal transaction would be months away, if it materialised at all.
If the two companies do agree a merger of their residential gas and electricity operations, it would create the third-largest supplier behind Centrica-owned British Gas and Octopus Energy.
As the larger company, with 4 million customers, Ovo would probably be the acquiring entity, but with Iberdrola potentially contributing cash and remaining as a shareholder in the enlarged group, according to one banking source.
Scottish Power serves about 2.4 million households.
The discussions between the two companies are running in parallel to a separate process through which Ovo is exploring the potential to raise roughly £300m from the sale of new shares in the company, according to industry sources.
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In recent weeks, a number of financial investors have been contacted by Rothschild, the investment bank advising Ovo, about the opportunity.
Exactly a year ago, Sky News revealed that Ovo had hired Rothschild to explore options including bringing in a new investor or a sale, 15 years after it launched in a bid to challenge the industry’s oligopoly.
Founded by Stephen Fitzpatrick, the entrepreneur who now owns London’s Kensington Roof Gardens, Ovo’s shareholders include the private equity firm Mayfair Equity Partners, Morgan Stanley Investment Management and Mitsubishi Corporation, the Japanese conglomerate.
Under Mr Fitzpatrick, who launched Ovo in 2009, the company positioned itself as a challenger brand offering superior service to the industry’s established players.
Ovo’s transformational moment came in 2020, when it bought the retail supply arm of SSE, transforming it overnight into one of Britain’s leading energy companies.
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Its growth has not been without difficulties, however, particularly in relation to its challenged relationship with Ofgem and a torrent of customer complaints about overcharging.
Justin King, the former J Sainsbury chief who now chairs Ovo, has made repairing its regulatory relationships a priority for the company.
He also oversaw the recruitment of David Buttress, who was briefly Boris Johnson’s cost-of-living tsar after leaving the top job at Just Eat, as its chief executive.
Key to Ovo’s longer-term valuation will be the performance of its technology platform, Kaluza, which was set up to license software to other energy suppliers and provides customers with smart electric vehicle charging and heat pumps.
Ovo announced last year that AGL Energy, one of Australia’s biggest energy suppliers, had bought a 20% stake in Kaluza at a $500m (£395m) valuation.
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The British energy company has also entered the electric vehicle car charging sector under the brand Charge Anywhere, adding tens of thousands of public charging points across the UK.
Iberdrola bought Scottish Power in 2007 in a deal valuing the company at more than £11bn.
Next week, the UK’s energy price cap will fall by 7% to £1,720 a year, following an announcement by Ofgem, the industry regulator.
Ovo and Scottish Power both declined to comment.
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