The sale of Veolia’s regulated UK water assets will hinge on keeping the competition authorities happy. What are its options?
Veolia Environnement is likely to invite “break-up” bids for its regulated UK water business, in order to raise the £1.2 billion or more that it is hoping to achieve from the sale.
While interested groups will be asked to submit bids for all three of the Veolia UK water companies (Veolia Central, Veolia East and Veolia Southeast), the offers are expected to contain agreements to hive off each company to a separate member within the bidding consortium.
This would seem to be the French company’s best bet of avoiding a referral to the Competition Commission, and thus maximising the proceeds it will receive from the disposal.
Although it is not certain that the Office of Fair Trading would decide that the sale of the three companies to a single buyer constitutes an industry merger under the Water Act (given that two of them were already owned by Veolia subsidiary General Utilities prior to privatisation), any risk of a referral would inevitably reduce the price buyers were prepared to pay.
The alternative would be to sell the three companies separately, but that would be a more complex process (particularly given the three’s integrated management arrangements), which would also have a negative impact on the price.
Veolia needs as full a price as it can get for the regulated water business – it is said to be aiming for a 20% premium to the companies’ March 2012 regulated asset value – as it looks to raise €5 billion from asset disposals over the next two years. To this end, the sale will need to be as “clean” as possible.
For this reason, it will not include Veolia’s equity stakes in Scottish and Northern Irish wastewater PFI contracts, all of which were acquired from either Thames Water or United Utilities between 2008 and 2011 (see table above). Neither will the French company retain any management interest in the three regulated water companies, a condition that restricted interest in Suez Environnement’s recent sale of a 70% stake in Bristol Water. “They will have learned that lesson from Bristol,” commented one industry consultant.
Despite industry analysts’ insistence that the UK water asset sale ought to attract a great deal of initial interest, Veolia may nevertheless struggle to attract many serious offers. The big infrastructure and pension funds that typically take the lead in bids for such assets – such as the Goldman Sachs and Morgan Stanley funds and Canada’s Borealis Infrastructure – may well be more focussed on the larger impending sale of E.ON’s gas transmission business in Germany (which is expected to fetch between €2 billion and €2.5 billion).