In its bid to secure vital capital and prevent potential nationalization, Thames Water has identified the US investment giant KKR as its choice of partner. The announcement is a dramatic move in the UK’s biggest water supplier’s ongoing quest to shore up its finances, burdened as it is with an intimidating debt level of approximately £20 billion.
New York private equity company KKR is set to take a £4 billion stake in Thames Water. The deal is to be concluded by the end of June, with completion to be done during the second half of the year. The move comes at a tumultuous time for the firm, which recently experienced difficulties, such as the sudden exit of its chief financial officer, Alastair Cochran, last Friday. Cochran, who also acted as interim co-chief executive, departs as Thames is dealing with increasing financial stress after a court decision compelled it to take on billions more in debt.
Besides KKR, other big guns had expressed interest in investing. Bloomberg News previously wrote that UK-based business water retailer Castle Water, which supplied water to more than 250,000 clients, had also put in a £4 billion bid. Others that made it to the contenders list were Hong Kong’s CK Infrastructure Holdings, owned by CK Hutchison, and London-based investment company Covalis Capital.
Thames Water, serving 16 million London and southeast England customers, continues to hold fast to its turnaround strategy. “The company continues to be 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 wider economy,” it said.
KKR is no stranger to the UK water market, having already held a stake in Northumbrian Water. Both Thames and Northumbrian had before objected to the UK competition watchdog over the Ofwat regulated increase in bills in the five-year period, following which Thames first sought to appeal but eventually delayed it after an agreement was reached.
The most recent updates point towards significant losses for senior bondholders, with Thames admitting that KKR’s offer will entail a “material impairment” of the company’s Class A debt. Negotiations continue over the rest of the deal.
Public anger at the privatised water industry has been increasing, with families confronted with sharply spiralling bills while firms are still under fire for their role in environmental scandals, notably the dumping of raw sewage into rivers and waterways.
Cat Hobbs, a founder and director of the campaign organisation We Own It, was highly critical of the deal. “KKR is a private equity company that prompted a book and movie about corporate greed entitled Barbarians at the Gate,” she said. “Thatcher’s privatisation of water in 1989 opened the gate to the ‘barbarians’ and handed them the keys to the kingdom. With record sewage pollution and water charges rising by 26% this week, what we are seeing is the disastrous failure of that experiment in privatisation.”
All but one of the six bidding groups had allegedly requested guarantees that they would be able to avoid or mitigate potential fines for underperformance. The Guardian previously exposed in March how Thames had requested Ofwat to show mercy on billions of pounds of costs and fines in the next five years, as part of its bid to recapitalise.
Hobbs is not convinced that KKR’s investment will yield any meaningful change. “If KKR does get a £4bn stake in Thames Water, that will make no difference to the picture. They will still be drowning in debt, still seeking to avoid environmental penalties, and will still prioritize shareholders ahead of bill payers and the environment,” she said. She calls for Thames Water to come under special administration—a short-term nationalisation action—because, in her opinion, there is no other acceptable way of trimming debt and finally bringing the firm back into state ownership.
Castle Water, a failed bidder, is based in Blairgowrie, Scotland, and has over 250,000 business customers. The company is co-owned by Graham Edwards, the Conservative Party treasurer.
In addition, Thames also just obtained approval from the Court of Appeal to access an emergency cash bailout of £3 billion from existing creditors. It was determined that this financial lifeline was required in order to preserve the company from entering into special administration, something that had been on the verge of occurring.
Thames Water’s ageing infrastructure remains a concern as scrutiny intensifies. Discussion about the industry’s ability to provide customers with reliable and sustainable services was fueled by a recent BBC broadcast that disclosed the deteriorating state of its assets. Despite KKR’s planned investment, Thames Water’s future remains uncertain because of increasing financial pressures and future regulatory challenges.
