global credit crunch may have put the brakes on a debt-fuelled
buyout frenzy, a fresh surge of interest in water companies has
seen the sector defy cooling takeover activity elsewhere.
funds assembled by major investment banks are on the prowl for
companies coveted for stable cash flows and rich asset bases.
Water owner Kelda was the latest to succumb, agreeing to be
bought for £3 billion by a consortium featuring HSBC,
Prudential and Citigroup.
follows Royal Bank of Scotland's £4.2 billion sale of Southern
Water to a joint venture between JP Morgan and Australian
infrastructure fund Challenger.
report from ratings agency Standard & Poor's suggested they
could have as much as $150 billion (£72.5 billion) to spend.
funds are backing the spree, with the longevity and steadiness
of water assets seen as a good match for the funds' long-term
prospects for the economy darken with banking stocks under
pressure and a host of retail profit warnings, water is seen as
the safe haven likely to be unaffected.
leaves the likes of Northumbrian Water, South West Water owner
Pennon and Birmingham-based Severn Trent - the listed firms left
from the ten regional English and Welsh water companies that
emerged on privatisation in 1989 - in the spotlight.
Kleinwort analyst Geraint Anderson said: "I think any of
the other companies could be vulnerable. All have the attributes
sought after, such as steady cash-flows and regulated returns.
does seem the credit crunch has not impacted the ability to
raise funds to buy them. They are an attractive asset
much more difficult to buy utilities in Europe, which has turned
the attention to the potential UK targets.
regulator Ofwat is likely to drive a tougher deal from utilities
ahead of the next review period beginning in 2010, big
infrastructure funds are ready to splash out despite inflated
have got to spend now - you don't earn fees sitting on your
hands," Mr Anderson adds.
recent sale of Southern Water raised eyebrows among UBS analysts
because of the high premium paid compared to the value of
regulated assets - 41 per cent, according to the investment
Rohit Agarwal said: "While we believe the sector should
trade at a discount to the Southern Water bid, the current
discount is too large.
believe the supply of new funds to private equity and
infrastructure investors remains strong, which could lead to
increased competition for a limited number of assets."
"We have had six leveraged buyouts in two years and believe
there is a good chance this will continue."
Southern, other water companies changing hands include Anglian,
Thames, Walsall-based South Staffordshire, South East and
Bristol Water. South East and Mid Kent Water are currently
merging to create the second largest water supply company in
England and Wales.
such as investment bank Macquarie's £8 billion swoop for Thames
Water last year have already revealed the potential gains.
reported a 50 per cent rise in profits to almost £200 million
in the six months to September 30.
excitement surrounding the industry is reflected in the share
Northumbrian Water and Severn Trent have all seen shares
stronger in recent months - a remarkable performance
highlighting the attraction of the sector given stock market
to sector watchers, Severn Trent could be the next water company
to fall into the hands of the infrastructure firms.
Stanley analyst Jeremy Batstone said the company is an
attractive bid play despite the prospect of tens of millions in
fines hanging over the firm due to customer service data
misreported to industry regulator Ofwat - as well as three
criminal charges over allegedly false leakage data between 2000
Trent is trading at a relatively low premium to regulatory asset
value, adding to potential takeout gains, while the culmination
of action over the data issues would put an end to the
uncertainty hanging over the business,
Batstone argues. He added: "We do not think executives are
wedded to independence like others in the sector."
out losses from the summer floods, Severn Trent cheered
investors with first-half profits of £161 million, beating
Stanley rates the stock favourably compared to Pennon, which the
broker argues now looks expensive - even for the tastes of
infrastructure funds - after takeover talk inflated shares
earlier this year.
fancies Severn Trent but highlights the potential of
Northumbrian Water due to its low trading premium to regulatory
hurdle is the 25 per cent stake held by the Ontario Teachers
Agarwal said: "It is debatable whether Ontario Teachers
would be willing to sell its stake, launch a bid itself or hold
on to its current investment."
its £6.4 billion market value, United Utilities could even
feature on the shopping list after its £1.8 billion sale of the
North West electricity distribution network.
disposal could make the company a target "if size is not a
constraint", Mr Agarwal adds.
current explosion of activity, few - if any - are betting
against further deals. Although merger and acquisition activity
has dried up elsewhere, in the water sector at least it may be
some time before the big-spending funds are ready to turn off