(Bloomberg) -- Investors gave a lukewarm response to Thames Water’s equity raise, with several potential bidders ruling themselves out of the process, and the viability of one offer in doubt.
CK Infrastructure Holdings — one of the firms tipped to invest — decided against placing a preliminary bid, according to people familiar with the matter. Thames set a deadline of Thursday for indicative bids.
Carlyle Group Inc. and Brookfield Asset Management Ltd., which were approached by Thames’ representatives, also declined to place a bid, according to other people familiar with the process. Castle Water Ltd. — a relatively small firm that runs a non-household water and sewerage business — is in the process. It’s offered to inject £4 billion ($5.1 billion) in equity into the beleaguered utility.
Thames is buckling under a £16 billion debt pile while struggling to deal with chronic leaks and sewage spills. It desperately needs to find at least £3.3 billion in new equity after its existing shareholders declared the business “uninvestible” earlier this year. Without new funding, it would likely be forced to apply for special administration — a form of temporary nationalization.
Potential bidders were deterred by the lack of clarity over returns and Thames’ ongoing debt restructuring, some of the people said.
Spokespeople for Thames, CKI, Brookfield and Carlyle declined to comment. A representative for Castle declined to comment on the viability of its bid.
Ofwat Ruling
Regulator Ofwat won’t set the level of allowed equity return for the next five years until Dec. 19. Even then, Thames may decide to appeal the final ruling to the Competition and Markets Authority, a process that could take up to a year.
Separately, the company is also awaiting a court hearing on Dec. 17 to approve as much as £3 billion in emergency debt funding as part of a restructuring plan that will allow it to continue operating into the new year. Even if that is approved, it still needs to undergo a more holistic restructuring next year, which may require some creditors to take haircuts.
CKI, a Hong Kong-based company led by Victor Li, the eldest son of billionaire Li Ka-shing, is holding out from placing a bid as it awaits clarity from Ofwat on the potential regulated returns, the people said.
As CKI, together with its affiliate companies under CK Group, controls another UK water supplier, Northumbrian Water Group, it also needs clarity on how Ofwat’s ruling will affect that business. It could continue to negotiate a prospective investment in Thames Water outside of this process as it remains interested in further investing in the UK, one of the people added. The company debuted a second listing in London in August.
Castle Water
As for Castle Water Ltd., there are also questions about how it would raise the billions needed to turn Thames around. After taking over Thames’ retail supply business in 2017, it has assets valued at around £278 million — about 1% of the size of Thames’ £23 billion asset base.
Castle had £34 million cash at the end of March this year, and is in a net liability position, meaning it owes more than it controls, according to filings at Companies House.
“To allow this takeover without stringent conditions would demonstrate that the regulator Ofwat is desperate to avoid the special administrative regime,” said Tim Whittaker, a research director at the EDHEC Infrastructure Institute.
But a person familiar with Castle’s plans said it does have access to promised equity, as it is ultimately backed by The William Pears Group, a financing and real estate firm. Castle’s biggest shareholder is the property investor Telereal Trillium, chaired by Graham Edwards, who is also the treasurer of the UK opposition Conservative Party. TT Group, as the company is also known, is in turn owned by three funds settled under the Bernard Pears 1967 Family Trust.
Castle’s true net debt, when accounting for loans from its parent company, was £66 million last year, its latest accounts show.
“It remains to be seen if Castle could raise the equity required to support the investment and pay down Thames’ debt to a more sustainable level all the while earning the return that Ofwat has allowed for the next regulated period,” Whittaker said.
--With assistance from Ben Stupples and Lucca de Paoli.
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