SE Water carried on refinancing wave
- From: Vol 4, Issue 10 (October 2003)
- Category: General
- Region: Europe
- Country: United Kingdom
- Related Companies: AWG, Barclays Capital, Bristol Water Holdings, CKI, CVC Capital Partners, Ecofin, Goldman Sachs, Macquarie Bank, Mid Kent Water, Saur/Bouygues, South East Water, Southern Water, Stone & Webster, Veolia Environnement (formerly Vivendi Environnement) and WestLB
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As the price review casts a shadow over the UK water and sewage companies, interest has switched to the water-onlies.
Bouygues announced on 1 October that it had sold South East Water for £426m (1607m) to the Macquarie Bank Group of Australia, as interest in the English water-only companies continues to build.
Macquarie, which is setting up a European infrastructure fund, saw off competing offers from CVC Capital Partners, the Hong Kong-based CKI Group, UBS and a venture led by Ecofin, amid claims from its rivals that it was the Australian bank’s access to cheaper finance that had enabled it to outbid them.
The price, which includes the assumption of £40m of debt, represents a 2% discount on the company’s regulated asset value of £435m – which some believe is too high, relative to the rest of the sector. However, Macquarie maintained its long-term relationship with Bouygues and the speed of execution it had been able to offer were the decisive factors.
Jim Craig, managing director of Macquarie European Infrastructure Fund, said: “What’s important about this asset to us is that the cash flows are ideal for an infrastructure fund”. He said the fund would be aimed at long-term institutional investors, such as pension funds and life insurers.
Craig also said that Macquarie would reduce South East Water’s cost of capital – and enhance those cash flows – by refinancing the company with a structured capital market bond issue within the next 3-6 months, a move that would increase the company’s gearing to 80-85%.
South East Water, which was acquired by Bouygues’s infrastructure division Saur in 1989, serves 1.5 million people in the south east of England. It employs 600 and expects a turnover of £100m in 2003.
Saur said that given cumulated profits in the consolidated accounts and the fluctuation in exchange rates, it would book a loss of 118m on the sale, including the expenses incurred on the transaction.
The sale of South East Water came at the end of a month that saw considerable activity in the UK water-only sector.
On 23 September, Bristol Water – which supplies about 1 million customers in southwest England – announced it would return £50m to its shareholders through a special £1.35-a-share dividend as part of a financial restructuring.
The move followed pressure from Ecofin, the infrastructure advisory and investment group, which acquired a 24.5% stake in Bristol from Vivendi in 2002. Bernard Lambilliotte, Ecofin’s managing director, said the restructuring would see the company’s gearing increase from less than 50% to 60-65%. “Our experience is that between 60 and 65 per cent is the right level”, he added.
Around the same time, it emerged that German investment bank WestLB was looking for a buyer for Mid Kent Water, the company acquired by the bank’s now largely discredited Principal Finance Unit for £106m in 2001.
WestLB has extended the mandate of US investment bank Goldman Sachs, which was advising it on the future of the PFU, to pursue offers for the individual companies in the unit. The move appeared to scotch the plans of Robin Saunders, the high-profile US banker who heads the unit and who attempted a hostile takeover of AWG earlier this
year, to make a bid for the whole business.
Loss on sale
It seems that WestLB will be obliged to incur a loss on the sale of Mid Kent. For although the company now has a regulated asset value of £170m, its debts now exceed this figure. Furthermore, when Saunders tried to sell Mid Kent to further the AWG bid, the only firm offer fell way short of the company’s RAV.
“I think the widely shared view is that it’s over 100% geared at the moment and that she [Saunders] – or WestLB – are going to have to take a hit if they want to sell it”, said Keith Tozzi, the former SEW chairman (who resigned when Saunders put the company up for sale).
Nevertheless, the water-only companies are clearly attracting more and more interest from investors, particularly financial buyers who clearly see them as offering an attractive return in the next 3-5 years if the industry regulator Ofwat relaxes its opposition to mergers in the industry.
There is broad consensus that the costs of these businesses could be reduced significantly if their captive water and sewerage companies were allowed to take them over – and those savings would justify a significant premium to their current valuations.
In cases where a water-only company crossed the boundaries of two large integrated firms – such as SEW with Thames and Southern Water – investors could even benefit from a contested takeover. “You could potentially end up with a bidding situation and get a better return”, said Neil Beddall, utilities analyst at Barclays Capital.
Ofwat will not receive the report it has commissioned from consultant Stone & Webster on the implications of industry mergers until December and will not act on it until next year. However, most believe the policy will change to allow takeovers at the water-only level. “Any future consolidation will start with the water-only companies”, said Lambilliotte at Ecofin.