home
Water Industry News

 

RWE to Sell American, Thames Water to Focus on Energy 


Nov. 4 (Bloomberg) -- RWE AG, Europe's third-largest utility, plans to sell Thames Water of London and American Water Works Co. of New Jersey, abandoning a five-year, $17 billion expansion that drew investments away from growing energy markets.

Chief Executive Harry Roels will first start the sale of American Water and then divest Thames Water, Essen, Germany-based RWE said today. The plan to sell both businesses during 2007 led to the largest gain in RWE shares in almost four months.

As RWE built the water business, its stock during the past five years lagged behind E.ON AG, its closest competitor, which targeted European power markets as prices increased. Roels on a conference call said he plans to distribute more of the company's profits to investors as dividends and expand further in Europe.

``Shareholders will love it,'' said Markus Ilg, who helps manage $80 billion for WestLB, including shares of RWE. ``The way of the sale is a good idea, the increase in the dividend is very welcome and axing debt gives the company more financial flexibility.''

The shares rose 1.64 euros, or 3 percent, to 56.28 euros in Frankfurt. This year, the stock has risen 38 percent, outperforming the 14 percent increase of the 17-member Bloomberg Europe Electric Index. The company is worth about 31 billion euros on the stock market.

Roels, who declined to estimate the price of the sales, said he has already received interest for the businesses, which have predictable revenue. Roels first plans to start selling American Water because it needs approval from 10 states in the U.S.

Freeing Up Cash

The sale frees up cash for RWE. Roels's predecessor, Dietmar Kuhnt, bought London supplier Thames Water for $9.8 billion in 2000. The company plans to invest another 3.1 billion pounds ($5.5 billion) through 2010 to replace Victorian-era pipelines that leak one of every five gallons.

American Water Works, the largest private U.S. water company, plans to spend at least $2.5 billion on its operations, which RWE bought for $7.5 billion in 2001.

Roels, a veteran from Royal Dutch Shell Plc who took over at RWE in 2003, now plans to focus the company on selling electricity, natural gas and water in European markets, intending to save money by combining businesses.

``The concept of a global water player has not really worked,'' Roels said during the call. ``The energy business is our traditional strength.''

He plans to increase the share of net income distributed as a dividend to as much as 80 percent next year and in 2007, from 50 percent, and to use the sales proceeds to pay back some 5 billion euros in debt.

Capping Debt

The company plans to cap debt at 12 billion euros, below the 17 billion-euro limit. The company will release third-quarter results on Nov. 16.

RWE's water sale follows a similar strategy at Vivendi Universal SA, which reduced its majority holding in Veolia Environnement SA, the world's largest water company, to 5.3 percent in December. E.ON sold 81 percent of Gelsenwasser AG, Germany's biggest water utility, in 2003.

Investor interest is increasing in European water assets. A unit of Terra Firma Capital Partners Ltd., a buyout firm controlled by Guy Hands, on Oct. 17 said it will proceed with a 453 million-pound purchase of U.K. water and gas company East Surrey Holdings Plc.

Bristol Water Group Plc, the 150-year-old supplier in western England, was acquired earlier this year and South Staffordshire Group Plc in central England was taken over in 2004.

Lagging Behind

RWE stock during the five years ending Oct. 21 has returned an average of 5.8 percent a year to investors, less than the 7.2 percent from E.ON, Europe's largest publicly traded utility. Fortum Oyj of Finland, the best-performing utility during that time in the Dow Jones Stoxx Utilities index, returned an average of 44 percent a year, according to Bloomberg data.

Among 36 investment analysts, 47 percent recommend buying RWE shares. E.ON has a ``buy'' rating at 77 percent of analysts, according to data compiled by Bloomberg.

Kuhnt bought the largest natural-gas distributor in the Czech Republic as well as Npower in the U.K. in addition to the water businesses. His strategy was to sell power, gas and water services to the same customers and save money in the process. The strategy is failing, said James Sparrow, an analyst at the Royal Bank of Scotland.

The strategy is appearing ``increasingly unconvincing,'' Sparrow said in a note published Oct. 26. ``RWE's focus is looking more energy based.''

To contact the reporter on this story:
Peter Dinkloh in Frankfurt at pdinkloh@bloomberg.net.

Last Updated: November 4, 2005 13:17 EST