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Thames Water preferred bidder KKR pulls out of rescue deal Thames Water preferred bidder KKR pulls out of rescue deal
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Future of troubled supplier in doubt as US private equity group says it cannot proceed with acquiring £4bn stakeFuture of troubled supplier in doubt as US private equity group says it cannot proceed with acquiring £4bn stake
Water industry in England and Wales needs ‘fundamental reset’Water industry in England and Wales needs ‘fundamental reset’
Business live – latest updatesBusiness live – latest updates
The US private equity group KKR has pulled out of a deal to inject fresh equity into Thames Water, leaving the troubled supplier’s future in doubt and increasing the prospects of a temporary nationalisation.The US private equity group KKR has pulled out of a deal to inject fresh equity into Thames Water, leaving the troubled supplier’s future in doubt and increasing the prospects of a temporary nationalisation.
The UK’s biggest water supplier had picked KKR as its preferred partner, but the company “indicated that it will not be in a position to proceed”, Thames Water said.The UK’s biggest water supplier had picked KKR as its preferred partner, but the company “indicated that it will not be in a position to proceed”, Thames Water said.
MPs said Thames was now in a “perilous position”, with some calling for the government to place it into a special administration regime (SAR), in effect a temporary nationalisation. MPs said Thames Water was now in a “perilous position”, with some calling for the government to place it into a special administration regime (SAR), in effect a temporary nationalisation.
However, the environment secretary, Steve Reed, told parliament he expected Thames to continue to pursue a “market-led solution” of obtaining new funding from its creditors, although he acknowledged the government “stands ready to intervene with a SAR” if required. However, the environment secretary, Steve Reed, told parliament he expected the firm to continue to pursue a “market-led solution” of obtaining new funding from its creditors, although he acknowledged the government “stands ready to intervene with a SAR” if required.
New York-based KKR was expected to acquire a stake worth £4bn in the water company, which is struggling under debts of nearly £20bn. Thames Water, which serves 16 million customers in London and south-east England, has the biggest debt burden – about £20bn – of any water company in Britain. It has become the symbol of the alleged mismanagement of the water industry since privatisation, with years of dividend payouts to shareholders fuelling deep public anger over creaking infrastructure and sewage leaks.
Thames said that, after completion of due diligence, KKR and the senior creditors had prepared detailed plans, including a turnaround strategy that had been shared with the company. The industry in England and Wales has “deep-rooted, systemic” problems, according to an interim review published on Tuesday by Sir Jon Cunliffe, a former deputy governor of the Bank of England. Cunliffe said he would recommend changes to simplify regulation of the sector.
KKR and a group of creditors, including Elliott Management and Silver Point Capital, had until last Friday to submit their plans to the regulator Ofwat to fix the water company. For Thames Water, KKR’s withdrawal raises further uncertainty over its future. New York-based KKR had been hoping to acquire Thames and inject £4bn into it, after being chosen as a preferred bidder in March. Thames Water said that, after completion of due diligence, KKR and the senior creditors had prepared detailed plans, including a turnaround strategy that had been shared with the company.
Thames Water, which serves 16 million customers in London and south-east England, is now racing to hammer out an alternative plan with Ofwat and other stakeholders. It needs to secure fresh funding for its operations by the end of June. Sir Adrian Montague, the Thames Water chair, said: “While today’s news is disappointing, we continue to believe that a sustainable recapitalisation of the company is in the best interests of all stakeholders and continue to work with our creditors and stakeholders to achieve that goal.
Sir Adrian Montague, the company’s chair, said: “While today’s news is disappointing, we continue to believe that a sustainable recapitalisation of the company is in the best interests of all stakeholders and continue to work with our creditors and stakeholders to achieve that goal.
“The company will therefore progress discussions on the senior creditors’ plan with Ofwat and other stakeholders. The board would like to thank the senior creditors for their continuing support.”“The company will therefore progress discussions on the senior creditors’ plan with Ofwat and other stakeholders. The board would like to thank the senior creditors for their continuing support.”
KKR’s withdrawal will leave the turnaround job to the creditors, who include institutional investors such as Aberdeen, Apollo Global Management, BlackRock, as well as US hedge funds including Elliott Investment Management and Silver Point Capital. The creditors will have to put up billions of pounds of equity investment, as well as writing off debt nominally worth billions more.
KKR’s proposal involved slashing about £8bn of Thames Water’s debt, Bloomberg reported last month.KKR’s proposal involved slashing about £8bn of Thames Water’s debt, Bloomberg reported last month.
Some of Thames Water’s bond prices fell to record lows on Tuesday morning. KKR’s withdrawal sent the utility’s 2040 bond down 4p in the pound to 69p, while its euro-denominated April 2027 bond dropped 2 euro cents to just under 68 cents.Some of Thames Water’s bond prices fell to record lows on Tuesday morning. KKR’s withdrawal sent the utility’s 2040 bond down 4p in the pound to 69p, while its euro-denominated April 2027 bond dropped 2 euro cents to just under 68 cents.
KKR’s withdrawal prompted renewed interest from other companies that had submitted takeover bids. Castle Water, an independent water retailer, said it was still interested. “We are ready, willing and able to support the business with the requisite financing in place and can move quickly to provide Thames with the operational and financial support it requires,” a spokesperson said. KKR’s withdrawal prompted renewed interest from other companies that had submitted takeover bids. Castle Water, an independent water retailer, said it was still interested. “We are ready, willing and able to support the business with the requisite financing in place and can move quickly to provide Thames with the operational and financial support it requires,” a spokesperson said. Hong Kong’s CK Infrastructure was another bidder. However, Thames Water is not thought to be interested in progressing with an alternative bid.
The Liberal Democrat MP Charlie Maynard had intervened in an earlier court case to argue that Thames Water should have been put into special administration rather than pursuing the KKR plan. He said Thames Water’s financial state may have put off KKR.The Liberal Democrat MP Charlie Maynard had intervened in an earlier court case to argue that Thames Water should have been put into special administration rather than pursuing the KKR plan. He said Thames Water’s financial state may have put off KKR.
“It’s not surprising given the appalling state of the company’s finances,” he said. “The sooner Ofwat asks for Thames Water to be put in a special administration regime, the better. That is the only way of writing down the company’s debt to a sustainable level.” He added: “This demonstrates the case I’ve been making that the current restructuring process is deeply flawed.”“It’s not surprising given the appalling state of the company’s finances,” he said. “The sooner Ofwat asks for Thames Water to be put in a special administration regime, the better. That is the only way of writing down the company’s debt to a sustainable level.” He added: “This demonstrates the case I’ve been making that the current restructuring process is deeply flawed.”
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Last week, the company was hit with penalties of £123m, including a record £104m fine over environmental breaches involving sewage spills, as it failed to run and manage its treatment works and wastewater networks effectively. Thames Water’s financial situation has been worsened by persistent fines. It had pleaded with the regulator, Ofwat, to let it off those fines to make it more attractive to investors.
The company also received an £18.2m fine for breaking dividend rules, the first of its kind in the industry, which was first reported by the Guardian in December. Ofwat said the company had paid out cash to investors despite having fallen short in its services to customers and its environmental record. Last week, the company was hit with penalties of £123m. This included a record £104m fine over environmental breaches involving sewage spills, as it failed to run and manage its treatment works and wastewater networks effectively.
Thames Water had pleaded with the regulator to let it off those fines to make it more attractive to investors. The penalties also included an £18.2m fine for breaking dividend rules, the first of its kind in the industry, which was first reported by the Guardian in December. Ofwat said the company had paid out cash to investors despite having fallen short in its services to customers and its environmental record.
Last month, Montague told MPs on the environment select committee that the utility had come “very close to running out of money entirely” last year.Last month, Montague told MPs on the environment select committee that the utility had come “very close to running out of money entirely” last year.
On Tuesday, Alistair Carmichael, the chair of the committee, said it had raised concerns about the risks of having only KKR as a sole bidder. “Unfortunately, our concerns have been realised, putting Thames in a perilous position,” he said.On Tuesday, Alistair Carmichael, the chair of the committee, said it had raised concerns about the risks of having only KKR as a sole bidder. “Unfortunately, our concerns have been realised, putting Thames in a perilous position,” he said.
“The government has shied away from acknowledging the potential impact of this scenario on the public finances and must ensure that any takeover is in the public interest and does not line the pockets of financial institutions further to the detriment of customers and operational performance.”“The government has shied away from acknowledging the potential impact of this scenario on the public finances and must ensure that any takeover is in the public interest and does not line the pockets of financial institutions further to the detriment of customers and operational performance.”
KKR and Thames’s senior creditors declined to comment.KKR and Thames’s senior creditors declined to comment.
Separately, the South West Water owner Pennon Group said rising water bills would help fund its £3.2bn investment plans, as its financial losses deepened. Separately, the South West Water owner, Pennon Group, said rising water bills would help fund its £3.2bn investment plans, as its financial losses deepened.
Pennon pointed to a record year of investment, as it reported a pre-tax loss of £72.7m for the year to the end of March, up sharply from a £9.1m loss the previous year. Bills for South West Water customers increased by 28% on average in April.Pennon pointed to a record year of investment, as it reported a pre-tax loss of £72.7m for the year to the end of March, up sharply from a £9.1m loss the previous year. Bills for South West Water customers increased by 28% on average in April.