Agbar’s puzzling bid for Bristol

Subscription required

As a guest you can read up to 3 full articles before a subscription is required.

You can read a further 2 articles for free.

Subscribe Now, Sign up for a Free Trial, Log In

The Spanish company’s bid for Bristol Water looks too expensive and too rushed to be taken at face value.

Suez’s affiliate company in Spain, Sociedad General de Aguas de Barcelona (Agbar), announced an agreed £10.60-a-share offer for Bristol Water in the UK on 21 April. The £390 million deal will bring the Suez group (which controls Agbar through a 51% interest in Hisusa, which in turn holds 47.7% of the Spanish water company) back to the UK water sector exactly a year after selling its remaining interest in Northumbrian Water.

In the context of this background, the move is widely being interpreted as a strategic move to fend off a takeover bid from Veolia. UK water company executives and analysts are convinced there is no industrial logic for such an expensive bid. Agbar may become a takeover target when Suez completes its proposed €70 billion merger with the state-owned Gaz de France later this year.

Despite official denials by Suez, few in the industry doubt that the merged Suez/GdF entity will sell off the Suez Environnement business as soon as possible. The two French companies gave a presentation on the merger on 4 May which made virtually no reference to the water business.

Veolia has been looking to rebuild its water interests in Spain after the sale of its interest in FCC, the construction group which owns Aqualia. Agbar is thought to have been one of the main attractions of its abortive bid for the Suez group in conjunction with Italy’s Enel. The Catalan investment bank La Caixa, which is the minority shareholder in the Hisusa holding company which controls Agbar, is rumoured to be unhappy about the prospect of the GdF merger (although this has been officially denied).

The acquisition of Bristol could well block a Veolia bid for Agbar. This is because Veolia already owns Three Valleys Water and two smaller water-only companies in the UK and would face a reference to the
Competition Commission if it were to bid for Agbar.

“The purchase [of Bristol] adds a UK regulatory dimension that would act as a poison pill in the event of a possible Veolia Environnement bid,” said Robert Miller- Bakewell, utilities analyst at Merrill Lynch. “It doesn’t present an insurmountable barrier, but it does make hostile intentions more difficult for any corporate already represented in the regulated water business in England and Wales – as Veolia Environnement most obviously is.”

Miller-Bakewell also pointed out that “Agbar hadn’t previously indicated any interest to enter the UK water industry”, which supports the view that the Bristol bid was a defensive move. The speed with which the Spanish company and its financial adviser Société Générale put the bid together – and secured support for it from the target company’s management and largest shareholder – supports this interpretation.

The pair first approached the UK water company’s board about six weeks before they announced the bid – barely more than two weeks after Suez and GdF went public with their merger plan. “It was an unsolicited approach and it went pretty quickly,” said Michael Robinson, one of the SG directors who worked on the offer.

Commenting on the fact that Suez withdrew from the UK market last year for strategic reasons, Robinson said that Agbar was “quite keen to see [itself] as a separate company”.

“It takes a bit of understanding the logic, doesn’t it?” said Keith Tozzi, the former Mid Kent Water chairman who now heads the Concateno vehicle that is attempting to acquire and consolidate companies in the UK water sector – and for which Bristol would have been a potential target.

Tozzi added that there were no significant assets outside the regulated Bristol water business that Agbar could exploit, as the existing management had already disposed of most of the group’s non-core assets. “A lot of those benefits have already been stripped out of it. Bristol shareholders have done exceptionally well.”

The bid looks certain to succeed. Agbar already has the irrevocable acceptance from Ecofin Water and Power Opportunities – and a non-binding letter of intent from Axa – in respect of another 9.6% of the
shares. Ironically, Ecofin acquired its 22.6% interest in Bristol Water from Veolia, and led the bid vehicle that enabled Suez to exit Northumbrian.

The Agbar offer values Bristol\'s shares at £165 million – a 42% premium to the average closing share price over the past year. The buyer assumes outstanding debt of £160 million and a nominal £12.5 million of preference shares – which have a current market value of £18 million-£19 million. When this debt is included, the value of the offer rises to almost 60% of Bristol’s regulated asset value (£216.3 million as of 31 March) – the highest bid premium yet in the UK water sector.