BREAKINGVIEWS-UK utility’s AI unit can grow into monster price

By Yawen Chen

LONDON, July 11 (Reuters Breakingviews) - Britain’s biggest energy supplier is eyeing a high-voltage valuation. Octopus Energy is preparing to sell a stake in Kraken, its artificial intelligence-driven utility management arm, in a deal that could value the business at 10 billion pounds ($14 billion). That’s a big ask for a platform originating from the world of boiler rooms and power meters, but the appeal of what’s for sale goes beyond the realms of AI hype.

Kraken’s software enables customers to manage energy usage related to their electric vehicles, heat pumps and solar panels, which can both save them money and help balance the wider grid. Its edge has helped Octopus grow from a standing start to a 24% UK market share in a decade. Utilities juggling green targets with tight budgets and regulators keen to cut national emissions without causing blackouts are natural fans.

It’s scalable, too. Kraken, whose name derives from a mythical sea-monster, has entered 30 markets, including a recent licensing deal to let UK group National Grid use its services in the U.S. And its technology now spans sectors from energy to water and broadband. Annual recurring revenue rose sevenfold to 212 million pounds over the four years to April 2024. The number of contracted accounts was up around 40% from early 2024 to 70 million currently, and the company aims to reach 1 billion customers in a decade.

That sort of growth profile makes a 10 billion pound price tag less outlandish. If annual recurring revenue were to also grow sevenfold by 2028 to around 1.5 billion pounds, Kraken would trade just in line with more mature competitors Oracle ORCL.N and SAP SAPG.DE that change hands at 7 and 6 times 2028 sales. Fast-growing U.S. software-as-a-service (SaaS) firms like ServiceNow NOW.N trade even higher at 9 times, according to analyst forecasts compiled by Visible Alpha.

Grabbing market share quickly in a niche infrastructure market is admittedly easier than growing the bottom line, though. Kraken’s profitability growth is yet to match that of its top line: heavy spending on technology, talent and marketing have seen EBITDA decline since 2022, and it only amounted to 71 million pounds in the year to April 2024. For Kraken to be valued at around 20 times 2028 EBITDA, as U.S. SaaS firms are, it would have to also expand its 2024 level about sevenfold to 500 million pounds in the next four years. That could still happen if costs stabilise or start to fall, and if more pricing power translates to higher profit margins, but it’s a bigger ask.

When Octopus boss Greg Jackson sold a stake to Al Gore’s Generation Investment Management back in 2021, his whole group only fetched 3.4 billion pounds. That ticked up to 7.2 billion pounds in a subsequent June 2024 deal. If one unit is now worth 10 billion pounds, Octopus is due another big hike. And assuming Kraken’s growth persists, its valuation will begin to match its name.

Follow Yawen Chen on Bluesky and LinkedIn.

CONTEXT NEWS

Octopus Energy, Britain’s largest residential gas and electricity supplier, is weighing a 10 billion pound demerger of its technology arm Kraken and is close to hiring investment bankers, Sky News reported on July 5 citing sources.

A minority stake in Kraken of up to 20% is expected to be sold to external shareholders in order to help validate the technology platform’s valuation, the sources said.

The demerger, which is expected to take place in the next 12 months, would see Octopus Energy’s existing investors given shares in the newly independent Kraken business.

Citi, Goldman Sachs, JPMorgan and Morgan Stanley are among the investment banks invited to pitch for the demerger mandate in recent weeks.