S Poddar
US investment colossus KKR has been selected by Thames Water as its preferred partner as it seeks to raise much-needed cash and ward off the threat of nationalisation. With Britain’s biggest water supplier struggling under a looming debt of almost £20 billion, the move is another key step in its quest to stabilise its finances.
KKR, a New York private equity company, is set to buy a £4 billion stake. Thames Water hopes to complete the deal by the end of June, with completion anticipated in the second half of the year. The transaction comes at a difficult time for the company, which has just suffered a series of setbacks, including the sudden resignation of its chief financial officer, Alastair Cochran, on Friday. Cochran, also interim co-chief executive, departs as Thames struggles with increasing financial strain after a court decision compelled it to take on billions more in debt.
Apart from KKR, other big players had expressed interest in taking part. Bloomberg News had earlier reported that Castle Water, a UK business water retailer with more than 250,000 customers, also made an offer worth £4 billion. Other contenders were Hong Kong’s CK Infrastructure Holdings, owned by CK Hutchison, and London investment house Covalis Capital.
Thames Water, servicing 16 million customers in London and the southeastern part of England, continues to stick with its turnaround strategy. “The company remains committed to placing Thames Water on a more stable financial footing, executing its turnaround plan and delivering a market-led solution in the best interests of customers, UK taxpayers and the economy at large,” it said.
KKR is not unfamiliar to the UK water sector, which it already has a minority stake in in Northumbrian Water. Both Thames and Northumbrian have tried before to appeal to the UK’s competition regulator, questioning Ofwat’s bill rise decision for the coming five years. Thames had at first tried to challenge this ruling but now has agreed to postpone its appeal.
The most recent updates show that the senior bondholders will suffer huge losses, with Thames admitting that KKR’s offer will cause a “material impairment” of the company’s Class A debt. Negotiations are still going on for other parts of the deal.
There has been increasing public anger about the privatised water industry, with customers paying increasingly high bills as companies remain under the microscope for pollution, especially the dumping of raw sewage into rivers and streams.
Cat Hobbs, the director and founder of the campaign group We Own It, said she had serious concerns about the agreement. “KKR is a private equity group that inspired a book and film about corporate greed entitled Barbarians at the Gate,” she said. “It was in 1989 Thatcher privatised water that opened the gate to the ‘barbarians’ and provided them with keys to the kingdom. With historic sewage pollution and water charges up by 26% this week, what we see here is the catastrophic collapse of that privatisation experiment.”
All but one of the six bidding groups had reportedly asked for guarantees that they could avoid or cope with potential poor performance. The Guardian earlier broke the story in March that Thames approached Ofwat for forgiving billions of pounds in fees and penalties during the next five years, as part of its recapitalisation bid.
Hobbs is still not convinced that KKR’s investment would make a difference. “If KKR does manage to get a £4bn stake in Thames Water, it will make no difference whatever. They will remain up to their eyeballs in debt, still attempting to avoid environmental penalties, and will still put shareholders before bill payers and the environment,” she said. She wants Thames Water to be taken under special administration—a temporary nationalisation option—because the only realistic way to pay down debt and end up with a fully public-owned company is that way.
Castle Water, another failed bidder, is based in Blairgowrie, Scotland, and supplies water to more than 250,000 business customers. The company is part-owned by the Conservative Party treasurer, Graham Edwards
