Deutsche pays £189 million for Sutton

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The price for the small water-only company is 30% more than the regulated asset value. It is a sellers’ market.

The UK water sector received further confirmation that its companies remain a compelling investment when a fund owned by Deutsche Bank paid £189 million for Sutton and East Surrey Water at the end of the year – a premium of more than 40% to the regulated asset value of the business.

The Deutsche fund bought Sutton and East Surrey from Guy Hands’ Terra Firma group, which acquired the small water-only operation as part of its controversial £453 million purchase of East Surrey Holdings – the Takeover Panel obliged the private equity group to go through with the takeover after it had tried to withdraw its offer following regulatory intervention in ESH’s Northern Ireland gas business.

While Sutton and East Surrey has four subsidiary operations that are outside its regulated water business – in plumbing, aggregates, building supplies and property – analysts believe these to be worth no more than £10 million collectively, which still leaves Deutsche paying a premium of over 30% of RAV.

“It’s the highest anybody’s paid,” said Keith Tozzi, the former Mid Kent Water chairman who now heads the Concateno AIM-listed vehicle, set up last year to make acquisitions and consolidation plays in the sector. Concateno was initially interested in Sutton and East Surrey as its first investment until financial bidders took the price too high.

The high price reflected Deutsche’s desire not to miss out as they did in February 2005 when Australia’s Hastings Fund Management paid a 27% premium to RAV Mid Kent. Similar premiums were also paid for two other small water-only companies – South Staffs and Cambridge – by foreign buyers the previous year. “On each of those sales, there’s just been somebody who’s been determined to get it [at any price],” complained Tozzi.

The price Deutsche was prepared to pay frustrated Concateno’s aim to complete its first acquisition before the end of 2005. Under AIM rules it will now need to seek re-affirmation for its plans from shareholders in April, but Tozzi remains confident that they will continue to support the venture until the right opportunity arises. “We genuinely believe that if we could get one, there are a number of things that would fall into place,” he said.

Terra Firma is reportedly interested in aquiring Thames Water from RWE (see Need to Know).