Two steps forward, one step back
- From: Vol 7, Issue 11 (November 2006)
- Category: Market insight
- Region: Unspecified
- Country: Japan, Spain and United States
- Related Companies: Aguas Andinas, Aguas de Barcelona, Aguas Decima, Aguas Illimani, American Water Works, Aquafin, Aquarion, Berlinwasser, Biwater, Bristol Water Holdings, Cambridge Water, Cascal, FCC, Iberdrola, Marubeni, Meta Modena, Mid Kent Water, Nuon, Penta, Pinsent Masons, RWE, Sabesp, Saur, Severn Trent, SmVaK, Southern Water, Suez and Veolia
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In his annual review of the international private water industry, David Lloyd Owen finds a proliferation of smaller deals, but still some big disappointments.
The large number of contracts awarded during 2004-05 and identified while researching the 2006-07 edition of the Pinsent Masons Water Yearbook highlights how keeping track of smaller companies is a trickier task than jotting down the achievements of the leading international players. They also show how important these local companies are becoming, and how they are providing the sector’s momentum.
While the number of new contracts identified this year (serving a further 20 million people) appears small, it is increasingly evident that there is a lag involved in identifying new contracts, especially in China, now that they are not being ‘delivered’ by the major players. The contract losses this year have been appreciable but long anticipated, and their demise has a certain cathartic effect. While the Americas remain a vexatious place, reform is sweeping across the MENA states and China continues to dazzle, almost too brightly at times. The sector is changing fundamentally with its shift towards local companies and local capabilities. It is up to the global funders and players to re-engage with this process.
Contract losses highlight Latin America’s low tide
Despite the excitable rhetoric of the anti-private sector lobbies, contracts may end for quite prosaic reasons, as was the case when Severn Trent concluded 15 years of involvement with Belgium’s Aquafin with a profitable share sale back to the original holders. Likewise, some contracts expire when their allotted time span has run its course. The original Yerevan and Tirana contracts have been in turn replaced by successor contracts in 2005-06. Such events are a healthy reminder that a concession is not for ever: it is in effect a slice of time and for a further slice to be gained, the contract has to have its evident charms for both parties.
The Argentine concessions fell by the wayside because the original contracts did not take into account the possibility that local currencies can fluctuate against the US dollar. In Bolivia, the Aisa contract ended due to political pressure unrelated to contract performance. In January, Bolivia’s newly elected president Morales created a water ministry charged with renationalising water operations, and Aisa was targeted. Abel Mamani, the water minister, previously ran FEJUVE, the anti-private sector pressure group. SISAB, the Bolivian basic services regulator, was meant to produce an audit about Aisa’s performance in order to justify the rescission of the concession. However, SISAB gave Aisa an A+ rating in April 2006 and qualified it as “Bolivia’s best firm”. As a result, Aisa is to hand the concession over in 2007.
The private sector’s role continues to grow, as do its prospects
To date, 548 contracts have been identified against the 459 contracts listed in the 2005-06 edition, 55 of these being in effect before October 2005. This is in part due to contracts in some countries (particularly China) not being identified for some time after their initial award, along with new data sources becoming available.
In 2003, we identified 485 million people being served by the private sector. This rose to 545 million in 2004, and to 563 million in 2005. The current year’s increase of 69 million is again partly due to identifying other contracts and companies, as well as new contract awards. In 1999, 5% of the world’s population was served to some extent by the private sector. By late 2006, this had increased to 10% of 6.27 billion people (2003 population data).
In every year from 1999 to 2003, our forecast for
M&A reflects the shift towards cheap finance
Mergers and acquisitions activity in the sector has been remarkably intense over the past decade, reflecting how ownership changes as strategies and perspectives change. Over 80 corporate transactions (primarily in the water sector and involving at least US$10 million being paid) have been noted since 1997.
In addition, more bids are in the offing, especially in Chile, the Philippines and perhaps in the UK. A considerable number of smaller transactions (typically 20-40 per annum) have also been recorded, especially in the US, where regulated utilities ‘tuck in’ privately owned small water systems near to their own systems in order to expand their customer base and benefit from economies of scale.
The two bids for Thames are for somewhat different entities. The €11.3 billion bid in 2000 included £4.3 billion for the company’s listed shares, while the £8.0 billion bid in 2006 includes pro forma net debt of £3.2 billion. RWE believes that it has made a profit of at least €500 million from this sale.
Looking back, at least 11 companies have changed hands twice during this period, ranging from Thames Water and American Water Works at one extreme, to Cambridge Water and Mid Kent Water at the other. This is likely to be a unique era of corporate activity for the sector.
Since 2002, deals by utility companies have mainly been for local entities, as private equity has accounted for the major acquisitions.
There was one IPO during the year, but COPASA is the largest such company to enter the market since the SABESP offering a decade earlier. There are plenty of possible share offerings in the pipeline, including more equity from Aguas Andinas and the ever-shifting possibilities for Thailand’s MWA and PWA.
The futility of multi-utilities?
The power-water multi-utility approach remains out of fashion except amongst certain adherents in the UK and France, along with strategic stakeholders in, for example, Malaysia. If Suez and Gaz de France merge, it will be interesting to see if they regard water as a core business area. Already one corporate financier has suggested Suez Environnement should be divested. Considering La Lyonnaise’s fleet-footed performance when it was not encumbered with Dumez or Suez, this may allow this great company to rediscover itself.
The Spanish Armada settles closer to home
As the general retreat from Latin America continues, ranging from Agbar’s exit from Argentina and Uruguay to Iberdrola selling Chile’s Aguas Décima to Marubeni, FCC and Agbar have decided to take a look at activities closer to home. FCC’s Aqualia acquired SmVaK (water and sewerage services in Bohemia) from Penta Finance, a private equity house based in the Czech Republic, while Agbar bought Bristol Water in an agreed bid. The latter has its own subtext, as just four years ago it was 27% held by Veolia, but was divested by the latter as part of the thwarted run-up to acquiring Southern Water.
New players also reflect a more localised market
All companies leaving the sector in 2006 are based in the EU. In Italy, Meta Modena has merged with Hera of Bologna, while England’s Bristol Water and the Czech Republic’s SmVaK have been bought by Spain’s Agbar and FCC, respectively. In Belgium, Aquafin’s private sector investors were bought out, while Nuon of the Netherlands sold its share in Cascal to Biwater, its joint venture partner.
In contrast, Thames and Aquarion are set to re-emerge under Macquarie’s wings, and American Water Works will return to the New York Stock Exchange after its three-year sojourn with RWE. It is anticipated that Thames Water International will be broken up and sold off, with the sale of the China Water Company stake leading this list. Perhaps the most intriguing speculations surround Suez’s water and waste activities, which may again go their own way when Suez’s current merger moves have ended.
The big beasts roar a little less
In 2002, the author declared that the acquisition of market share by the leading five companies was a ‘remorseless’ process. It is evident that when events turn against them, a retreat can be equally so.
The break-up of Saur, Suez and Agbar’s retreat from much of Latin America, and the recasting of RWE as a regional water player has changed their relative importance, especially as local companies step up their activities in Asia and Latin America. Veolia, on the other hand, has built up its activities, albeit in a very focused manner.
Suez, Veolia & RWE, along with Saur and Agbar, ran the show in 2002, but these are more complex times.
One new international player marks Japan’s belated entry
Until recently, one of the paradoxes of the water sector was the low profile of Japanese players in an industry they would be expected to dominate. This has partly been a consequence of their somewhat hobbled domestic circumstances, as well as a possible sense of caution in terms of allowing other companies to start off in a new, potentially risky business and learning from their mistakes. The wastewater sector is starting to be opened up in Japan (moving from one-year management contracts into multi-year O+M contracts) and companies are looking abroad. Marubeni’s previous experience was as Veolia’s junior partner for the Chengdu water treatment plant BOT. This year, Marubeni has acquired Berlinwasser International from VE and RWE, while acquiring Aguas Décima in Chile from Iberdrola and taking a more prominent role in desalination projects and discussing potential wastewater BOTs in China.
A change of perspective
While no firm trend can be attached to the above figures, it is reasonable to assume that the role played by international companies has eased, especially since 2002. This is not necessarily a good thing, as while local or expatriate funding obviates exchange rate risk, it plays a limited role in mobilising new sources of funds needed to attain the Millennium Development Goals. To date, expatriate funding has only been identified as being used in China.
It appears that a shift away from contracts being awarded to multinational companies to local and expatriate companies is taking place. This shift is even more dramatic when one considers that the 1995-99 period includes Brazil’s SABESP, which served some 20 million people at the time. While these changes are in part due to the problems encountered by multinational companies since the mid 1990s, especially regarding political and foreign exchange risk, they also demonstrate that local capacity building is starting to have an effect.