Leverage to remain low at Northumbrian
CKI’s £4.8 billion public-to-private bid for Northumbrian Water is unlikely to raise leverage at the operating company. The change of control may trigger some debt refinancing.
The Cheung Kong Infrastructureled consortium that made a £4.8 billion recommended offer for Northumbrian Water at the beginning of August will buck the recent acquisition trend in the sector and avoid a highly geared financing structure.
Whereas the last four big takeovers in the industry – Anglian, Thames, Southern, and Kelda – have all been led by infrastructure funds that have ramped up the firms’ leverage (at both the operating and holding company levels), the CKI consortium is wedded to an equity-heavy model. CKI and its partners, Cheung Kong Holdings and the Li Ka Shing Foundation, are providing £2.2 billion of equity to meet most of the £2,412 million cost of acquiring Northumbrian’s shares under the 465p-a-share offer. They are doing so by subscribing for shares and/or loan notes and other instruments in Northumbrian’s new holding company, UK Water, in which CKI and CKH are each taking a 40% interest and the foundation 20%.
CKI has raised an equity bridge loan in Hong Kong worth about £600 million to meet the bulk of its commitment, while the other two Li Ka Shing entities are meeting their share of the obligation entirely from existing resources.
UK Water will meet the £212 million balance of the acquisition cost from the £1.28 billion of credit facilities that it has arranged with Royal Bank of Canada, HSBC, and Barclays Capital. These facilities will also cover future capex requirements at Northumbrian and possibly the refinancing of some its existing debt (the company’s outstanding loans from the European Investment Bank contain change-of-ownership provisions).
While the additional debt is likely to involve a 7% increase in gearing at the holding company level, the rating agencies do not expect any subsequent downstreaming of debt to increase the gearing of the regulated water and sewerage business to more than 67.5% (from its present level of around 62%). On that basis, Fitch has affirmed the operating company’s A- rating (although it has put the BBB+ rating of Northumbrian’s intermediate holding company on negative watch).
“It appears that the consortium in this case doesn’t particularly want to have a highly leveraged structure,” confirmed Oliver Schuh, sector analyst at Fitch.
The difference in approach to the financing structure reflects CKI’s longerterm investment horizon – at least 20-25 years as opposed to the 10-12 years that is typical for an infrastructure fund. This (along with a significantly lower cost of capital than Ofwat has allowed the industry up to 2015) has enabled the Hong Kong consortium to justify paying a 42% premium to the utility company’s regulated asset value of £3.3 billion.
The acquisition should complete in October, after UK Water received an irrevocable acceptance of its offer from the Ontario Teachers Pension Plan, by far Northumbrian’s largest shareholder with a 26.8% stake. By the time it announced the recommended offer on 2 August, UK Water had also received non-binding letters of intent (to vote in favour of the scheme) from JP Morgan Asset Management (which holds a 3.8% stake) and Artemis Asset Management (which owns 2.9%).
CKI, meanwhile, completed the sale of Cambridge Water for £74.8 million (a premium of about 20% to the company’s RAV) to its financial adviser HSBC ahead of the announcement, to avoid an obligatory referral of the Northumbrian bid to the Competition Commission. HSBC is expected to initiate a sale process for the small water-only operation within weeks.