It seems hard to believe now but when RWE first revealed its plans to sell UK utility company Thames Water, private equity interest in the deal was expected to be limited. Although the deal was classic Terra Firma-type territory (and the Guy Hands-led firm fought hard for the mandate), similar bidders were expected to be thin on the ground. The fact the firm ended up in a fierce bidding war with two infrastructure funds, the Qatar Investment Authority and an Australian energy company is a stark illustration of just how hot a market UK infrastructure assets have become. RWE eventually sold Thames Water to Macquarie’s Kemble Water consortium for £8 billion ($15 billion) on October 16, which is an astonishing book gain of around €500 million for RWE.
This is becoming a familiar story: BAA, Associated British Ports, London City Airport and now Thames Water have all recently been sold to eager buyers. But the price paid for Thames (which is a full 27% premium to the regulated asset base) really underscores the impact that the interest in the sector and rapid growth in the sheer number of infrastructure funds is having on this sector. RWE owned Thames for six years, and for a long time it looked like an unsuccessful investment and one that the German firm was unlikely to make money from. The result achieved can be partly claimed by the teams at Goldman Sachs and Deutsche Bank (who ran the sale for RWE) but is primarily the outcome of two things: huge liquidity in the banking market to fund such bids and huge growth in the number of large-scale institutional investors reallocating away from traditional equity into alternative investments – but ones that are lower risk than more classic private equity.
As a regulated utility, Thames Water fitted the bill perfectly. The firm is unpopular with customers and faces an enormous investment programme to rectify its atrocious leakage record: 30% of its treated water is lost every day. But it has stable, non-cyclical cashflows and as such is able to attract financing on much more aggressive terms (often driven by a capital markets exit) than a more traditional private equity investment can – something that the bidders have put to good advantage. It is also big. Many of the large infrastructure funds are only interested in deals where they can get allocations of more than £500 million, a fact that only fuels the bidding war when such companies as Thames Water are put on the block.
The price that Macquarie was prepared to pay for Thames Water must now mean that all the other UK water companies are a potential target. Severn Trent Water or Kelda Group are fingered as next in the queue, with Terra Firma understood to have turned its attention to other UK water firms after missing out on Thames. Things haven’t been this exciting in the water sector since Welsh Water and AWG were restructured in the early 2000s. And the pent-up demand for infrastructure assets from an ever-growing group of institutional investors means that the pressure to sell might become overwhelming.
