Water sector heats up as bids accepted for two companies
THE rate at which infrastructure companies are changing hands picked up last week with news of bids for two water companies.
AWG, the owner of Anglian Water, confirmed on Monday that it had accepted a £2.2 billion offer from a consortium named Osprey.
Anglian, which is the UK’s second largest water-only utility and provides services to six million people, also revealed that it had received renewed approaches from rival groups. The shares soared on speculation that a bidding war would follow.
A spokesman for AWG said: “There can be no certainty that an offer will be made by any of these third parties. In the meantime, the board of AWG reiterated its recommendation of the offer which has been made by Osprey.”
The consortium is led by Canadian Pension Plan Investment Board and Colonial First State Global Asset Management, the asset management division of Commonwealth Bank of Australia. It also includes UK private equity firm 3i.
Osprey’s offer, which is equivalent to £15.55 a share, represents a 0.6% premium to the previous Friday’s closing price. The offer is also 295% more than the share price at the start of 2003, shortly before Peter Hickson became chairman of AGW.
But the stock climbed to a record 1629p on expectations that more bids would follow. AWG declined to identify the interested parties but it is believed they include Alinta, an Australian energy group, and US bank Goldman Sachs.
However, AWG has agreed to let Osprey match any higher offer and to pay a break fee of £22 million if it accepts an alternative proposal.
AWG said last month that Anglian Water performed “materially” above the company’s forecasts in the first half as a hotter-than-usual summer spurred demand.
The offer for AWG came as Australian bank Westpac agreed to buy South East Water from Macquarie, an Antipodean investment bank, for £665m.
Britain was one of the first countries to privatise its water industry in 1989, and since then the sector has always attracted foreign players. In the 1990s, French utility giant Lyonnais des Eaux bought up several water companies. Disgraced energy company Enron owned Wessex Water until its collapse.
In the past, power companies were also keen on owning water firms. Scottish Power had Southern Water and German firm RWE owned Thames. But as there were very few synergies between the businesses, their proprietors sold them off or are in the process of selling them off.
This is where the infrastructure funds come in. Having been active in Australia and Canada for the past 15 years, these funds have exhausted opportunities on their home turf and are now looking to do deals further afield.
They are attracted by the prospect of stable, long-term investments and predictable cash flows. They are also comfortable with the UK regulatory environment, which they consider to be transparent.
Clive Roberts, an analyst at stock brokers Charles Stanley, said water utilities are in demand because the funds get “a solid, long-term cash flow out of them”.
But he added: “From where I sit, they are paying too much for these companies. I can’t reconcile the price they are paying with the value of the assets.”
Lakis Athanasiou at Collins Stewart agrees. He predicts that the power water companies currently have to impose large price hikes will be limited by the regulator at the 2009 pricing review.
Global utility deals have ballooned to a record $21.2bn (£11.29bn) over the past 12 months, a 79% jump from the same period a year earlier.
The UK water sector is also unusual in that consolidation has been limited because regulators discourage mergers. They are keen to retain a number of independent companies that can be measured alongside each other.
This casts doubt over whether the Westpac acquisition of South East Water will be permitted, as it already owns Mid-Kent Water. For the first time in four years the water regulator Ofwat will have to scrutinize a proposal and decide whether it constitutes a water merger and will harm customers’ interests.
This may also be the reason Macquarie sold South East Water: it wants free rein to go after the biggest water company in Britain, Thames Water, which comes with a price tag of about £7bn.
Macquarie refused to be drawn on its specific plans, but said: “The fund and its investors remain very committed to the water sector and interested in other opportunities in the UK.”
The bank is one of three groups pursuing Thames. The others are Guy Hands’s Terra Firma and a partnership of UBS and the investment arm of the government of Qatar.
08 October 2006