Risks remain in Veolia UK water sale
- From: Vol 13, Issue 5 (May 2012)
- Category: General
- Region: Europe
- Country: United Kingdom
- Related Companies: Borealis Infrastructure, Goldman Sachs, Marubeni and Veolia Water
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The race to acquire Veolia Water’s regulated UK assets is likely to result in only a couple of serious bids. What is holding the market back?
Veolia will struggle to secure more than two bids for its regulated UK water business from among the four groups that registered initial expressions of interest at the beginning of May.
Industry insiders expect that only the bidding ventures led respectively by Goldman Sachs Infrastructure Partners and InfraCapital (which has teamed up with Axa) will submit binding offers for the three water-only companies – Veolia Central, Veolia East, and Veolia Southeast – by the end of June deadline. “In terms of real buyers, you probably only have two consortia,” maintained one source.
He pointed out that Japan’s Marubeni is unlikely to proceed further given the fact that the sale does not include Veolia’s non-regulated UK water assets, while the venture between iCON Infrastructure and Canadian pension fund manager PSP Investments would struggle to compete with the others on price. “Their cost of capital is quite different from the other three,” he explained.
With Canada’s Borealis Infrastructure deciding not even to go as far as the initial stage (and the Korean National Pension Fund likely to join one of the other bidding ventures, should it ultimately decide to participate), Veolia’s chances of realising its hoped-for premium of 20% or more to the regulated asset value of the three companies (currently about £1 billion) look slim.
While the French company has managed to resolve the uncertainty with industry regulator Ofwat over whether a bid for all three companies would necessitate a referral to Competition Commission (by agreeing with Ofwat to unify both the management and licences of the three companies), there are still factors to make bidders cautious.
Chief among these remains the decline of almost 7% in the RAV of Veolia Central – which accounts for more than 80% of the value of the business – over the current review period. Add in the uncertainty over what changes Ofwat might introduce at the next pricing review in 2015 (particularly if proposals in last year’s Government White Paper make it on to the statute book by then), and paying a significant premium to the current RAV looks risky.
“If you look at it in the context of the next decade – which a buyer would have to do – it’s clearly not going to get any easier,” said independent industry analyst Robert Miller-Bakewell. “The problem with clean water assets is that your RAV isn’t going to grow in the same way as it will on the wastewater side.”
The momentum which Veolia’s divestment programme seems to have generated (non-binding offers have also been received for the US solid waste business, while a further potential buyer has emerged for Veolia’s stake in transport division Transdev) underscores a growing confidence in CEO Antoine Frérot’s strategy. It is not only about selling assets, however. Earlier this year, Veolia bought about half of the stake held by the EBRD in the group’s Eastern European water business Veolia Voda for €79 million. The move was partly linked to Veolia’s decision to wind down its activities in a number of the geographies where it operates.