Corporate structure debate dominates in UK again

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The bidding battle for Hyder intensified at the end of July, fought out against the backdrop of a broader struggle within the UK water industry over preferred models of corporate structure.

The Welsh utility continues to be the focus of a bidding war between Nomura and Western Power Distribution. On 31 July Nomura raised its initial bid of 260p per share to 320p, which the Hyder board recommended to shareholders the next morning. However, before the day was out WPD had increased its offer to 340p. Hyder shares closed the month up at 323p and were up again at 347p at the end of trading on 1 August.

In the face of regulatory rate caps and increased investment requirements, water companies have been seeking ways to restructure in order to maintain shareholder value. Kelda’s recent plan to transfer its assets to a debt-financed mutual was watched closely by others in the industry as a possible solution. However, the plan was rejected last month by Ofwat as benefiting shareholders at the expense of customers.

Largely affected by the regulator’s position on Kelda, shares of UK water companies ended the month lower, underperforming the broader FTSE 100 index.

Analysts at Morgan Stanley Dean Witter remained positive about performance prospects for the industry, noting that the regulator’s decision had not blocked the road to mutualisation but had merely sought a different approach that would better balance the interests of shareholders and customers.

VE makes its debut in Paris
Vivendi Environnement (VE), the environmental services arm of Vivendi, started trading on the Paris Bourse on 20 July. The IPO, originally scheduled for 12 July (see GWI Vol 1 Issue 2, p.3), had been delayed by Vivendi as it tried to bolster investor interest in the issue.

Institutional investors, in particular, appeared cautious in the wake of Vivendi’s recent three-way merger with Seagram and Canal Plus. Vivendi’s transfer of its corporate debt to VE was also a cause of concern among investors. In the end, the company was forced to lower its IPO price to €32.50 for retail investors and €34 for institutional ones.

The first day of trading saw heavy volume. Institutional selling of previously subscribed shares was offset somewhat by buying from the retail side. Although the price of institutional shares fell 0.9% from the global offering rate, the retail share price rose 4.25% from its initial price to end the day at €33.88.

The price, however, was driven down over the next two days of trading by higher than expected selling of shares by holders of Vivendi convertible debt, who saw this as their opportunity to get out of Vivendi positions that had become too risky in their view. Vivendi therefore had to buy these shares to keep the price from falling. In total, nearly 80% of the bondholders opted to convert and then sell their shares. Despite a brief rally, the stock ended the month closing at €33.60.

As part of its effort to reduce current debt load, VE sold a 34% stake in Dalkia to Electricité de France in June, and on 19 July Vivendi Water, now a unit of VE, announced the sale of its Kinetics fluid equipment and treatment systems business to a German investment group. Proceeds from the IPO, together with these equity sales, are expected to cut VE’s debt load to around €11 billion, down from the current
€16 billion.

Readers should note two changes this month to the companies listed in our water stock table. In the light of the recent IPO of Vivendi Environnement, which will carry out the water, waste and energy operations of the parent, we have replaced the listing for Vivendi with that of its new subsidiary. We have also removed the listing for United Water Resources. Following the completion of its acquisition by SLdE on 27 July, the company ceased to exist as an independent entity and was de-listed from the NYSE.