Thames Water sold in €11.3 billion deal
- From: Vol 1, Issue 10 (October 2000)
- Category: Companies
- Region: Europe
- Country: Germany
- Related Companies: Allianz, American States Water, Berlinwasser, California Water Service Co (Cal Water), Electricidade de Portugal, Eon, Ionics, RWE, Saur/Bouygues, Southwest Water Company, Thames Water and Veolia Environnement (formerly Vivendi Environnement)
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German multi-utility RWE has acquired Thames Water in an €11.3 billion deal to achieve its target of becoming one of Europe’s three top water companies. Thames will keep its name and operate within the RWE group as Thames Water, a division of RWE. The company will be based in London and headed by Bill Alexander, current chief executive of Thames Water. RWE sees the acquisition of Thames as an important springboard for entry into the US water services market.
The Essen company is paying £12.15 per Thames Water share, a premium of 42.9% on last month’s average share price of £8.50 and a 32.8% increase on the closing price of £9.15 on 19 September, the day before Thames announced that takeover discussions were at an advanced stage. RWE is assuming €3.1 billon in debts, including those connected with the planned acquisition of US water utility E’town, New Jersey. Formal approval of the purchase is expected soon.
Further details of the takeover foresee Thames Water shareholders being entitled to an interim dividend of 20p per share for the year ending 31 March 2001. They will also retain the right to receive the final dividend of 32.7p per share for the year ended 31 March 2000. There will be an offer of 79p in cash for each Thames Water B-share and holders of B-shares will retain the right to receive the half-yearly dividend of 1.88859p.
Analysts have described the acquisition as strategically sound but are critical of the high price paid, particularly in view of the level of debt incurred. RWE shares on the Frankfurt Stock Exchange fell to €39.20 following the announcement. The Essen company is not short of cash but will still issue around €3 billion of long term debt to finance the share purchase.
The company said that the takeover will have an immediate positive impact on its earnings per share. RWE has already seen 1999/2000 net profits increase by 5% to around €1.2 billion.
Vivendi bid rejected
Negotiations with Thames Water, the UK’s largest water company, are believed to have started in the summer. RWE had a bid for Vivendi Environnement turned down early in July before the company went public. Around the same time Suez Lyonnaise des Eaux was involved in negotiations with German electricity provider Eon AG (which have since failed), thus ruling out any chance of a merger and leaving RWE to turn to Thames.
Water supply and wastewater will now take their place alongside electricity, gas and waste disposal as one of RWE’s central business areas. Executive director Dietmar Kuhnt estimates that the worldwide market potential for private companies in the water sector will grow from the present €90 billion to over €430 billion in the next ten years. With an annual turnover of €17 billion, Germany’s water sector is the biggest in Europe.
RWE is one of Germany’s top industrial companies. It was worth €20.1 billion on the Frankfurt Stock Exchange as of 21 September, making it one of Europe’s big six utilities. It has over 150,000 employees worldwide, active in water and energy supply and in RWE’s industrial divisions.
“As part of our multi-utility strategy, Thames Water will be the driving force in implementing RWE’s objectives in the water sector and in developing a world class global business,” said Kuhnt.
The weekend preceding the takeover, Thames announced the acquisition of Chilean utility Essbio (see page 4). RWE is fully supportive of Thames Water’s pending acquisition of E’town, the seventh largest US utility, which is awaiting the approval of US regulators. If it goes through as expected, the deal will be RWE ’s first venture into the US water market, bringing the multi-utility an additional one million customers.
24 million new customers
Before the takeover of Thames, RWE’s only significant water asset was its stake in Berlin’s water utility. It has 45% in a consortium set up with Vivendi (45%) and Allianz Capital Partners (10%) to acquire 49.9% of the Berliner Wasser Betriebe in 1999.
The acquisition of Thames will triple its client base to around 34 million. This compares with 100 million clients served by Vivendi Environnement.
The Essen company will have a market presence in London, Berlin, Budapest, Shanghai, Jakarta and Adelaide. RWE also has share s in a number of municipal utilities with water, wastewater and energy
In 1999, RWE served nine million water, gas and electricity customers in Germany and a further two million overseas. Turnover from water and wastewater activities in 1998/99 (to the end of June) reached €82 million, 13.7% down on the previous year, and water sales totalled 27.2Mm3.
Thames Water has 24 million customers world-wide and a total of 14,000 employees. Total turnover for the year ended 31 March 2000 was £1.48 billion (€2.48 billion) and net profit £335 million (€562 million).
Although still far behind Vivendi Environnement and SLdE, the new deal has allowed RWE to move ahead of its main German rival, Eon and become a significant international player. Ofwat price caps mean that Thames Water’s 12 million UK customers will not play a major commercial role.
However, RWE says the combination of Thames Water’s international contacts and its know-how in the water industry combined with RWE’s financial strength will enable the company to become a serious bidder for international projects.
Thames takeover: what will it mean?
Thames Water’s main attraction appears to have been its programme of aggressive international expansion. While the company has trailed behind Vivendi Environnement and SLdE in the global water market, it has still managed to accumulate an impressive collection of concessions and engineering projects.
Last month, it made the winning bid for a 42% shareholding in Essbio, Chile’s third largest water utility. Thames already owns a 45% stake in Essel in central Chile as part of a joint venture with Electricidade de
Portugal. It also has contracts in Asia, notably in China, Thailand and Jakarta.
However, it is Thames’ $900 million acquisition of US utility, E’Town which offers RWE access to what is probably the most lucrative overseas market. Outside the UK and Germany, the takeover of Thames is likely to have most significant impact in the US. Companies that may be affected are investor-owned utilities and water technology firms.
In particular, the California utilities, California Water Services, American States and Southwest Water are attractive because of their location in high population growth areas. The larger multi-state utilities will not
be immune to approaches from large foreign buyers either. Even the leading US water utility, American Water Works, with about $2 billion in sales, is small compared to the larger German companies. RWE had 1999 revenues of €8.5 billion and Eon had 1999 revenues of €13.5 billion.
Both Eon and France’s Saur have ambitions for growth in international water markets. Many analysts believe that, ultimately, only two or three large national water companies or foreign-owned multi-utilities will control the private US water utility business.
Further, if RWE intends to compete at the same level as Vivendi Environnement and SLdE it may also decide to consider expansion beyond regulated utility operations into the water equipment and services sectors, as both of the French companies have done. Thames already owns three US water products companies that specialise in pipe fittings, membranes and penstocks.
This could put firms like Ionics – which has a strong portfolio of products and services – on foreign buyer’s shopping lists.
Germany in play
The merger also enhances the prospects of picking up operating contracts from German municipalities which have existing relationships with RWE in electricity and gas. RWE holds stakes in a number of small municipalities each with several thousand customers.
While German market liberalisation looks inevitable it is unlikely to proceed with great pace. There is already considerable opposition to the Ministry of Economy’s plan to introduce competition into the sector. But faced with rising costs, some local authorities have engaged private companies to take on a job they could no longer fulfil alone. Berlin’s €1.6 billion sale of a stake in the BWB has been the most high profile deal to date. Others include Potsdam, Eisleben and Goslar.
With Thames’ know-how, RWE should be in a position to benefit from cross-selling and making use of a shared customer base. The Essen group has also just completed a merger with the VEW electricity group. The new company started operating on 1 October.