EMEA: Blackstone linked to Kelda stake sale

03 July 2018 - 12:00 am UTC

The sale of a majority stake in Yorkshire Water owner Kelda is attracting interest from a large number of infrastructure investors, with as many as 20 potential bidders having signed non-disclosure agreements ahead of first round bids later this month, sources said.

Two sources with knowledge of the process said Blackstone’s infrastructure business is one of the investors which has signed NDAs, along with PSP Infrastructure advised by Nomura. One well-connected source said a “large size consortium” is “likely to form”. 

New York-based Blackstone expects to hold a first close at USD 5bn for its inaugural infrastructure fund in coming days, Inframation reported last week. It has invested more than USD 40bn (EUR 34bn) in infrastructure since it began investing in the sector in 2002. Other infrastructure investments it has targeted recently include 50% of Maersk’s APM Terminals division, comprising 74 terminals worldwide, though the asset was taken off the market by Maersk.

The sale price for the 53.7% stake in Kelda being sold by Corsair Capital and DWS (formerly Deutsche Asset Management) is also relatively healthy, with several sources saying it is sizably over a 1.2 multiple to the company’s regulatory capital value.

One person close to the situation said that the sellers are seeking an equity price of around GBP 2bn for the combined 53.7% stake. 

An equity price of GBP 2bn for the combined stake equates to an enterprise value of around GBP 8.47bn for the company when net debt of GBP 4.75bn is considered. This is around 1.31 times Yorkshire Water’s last regulatory capital value (RCV) of GBP 6.45bn on March 31, as reported by regulator Ofwat. 

The market expressed mixed views about the value of Kelda. Some argue that it is hampered by a negative outlook arising from Ofwat’s price review 2019, as well as the fact that its inflation-linked swaps have a negative mark-to-market of just under GBP 2.6bn.

Others say that it is a controlling stake in a well-run water company, and that its swaps issue is a short term problem. One source highlighted the possibility that the swaps issue could be resolved by the incoming shareholders withholding equity dividends for a period of time.

A sale of the Corsair and Deutsche stakes in Kelda would be the first transaction involving a large UK water company since Ofwat in December outlined plans for reduced returns for water companies for the five-year period beginning 2020.

Although there is little data related to pricing on recent UK water transactions, Kelda’s listed peer United Utilities’ current enterprise value is currently around GBP 12.1bn, 1.1 times its latest RCV of GBP 11bn. Infrastructure investor HICL in March valued Affinity Water, in which it has a 36.6% stake, at 1.32 times its regulatory capital value of GBP 1.2bn. 

Given the size of Kelda Water, investors looking at a possible acquisition are likely to do so as part of a consortium, industry observers said. 

DWS and Corsair are understood to be in no rush to sell the assets. “It could happen this year or next year,” said one source close to the situation. 

Aside from plans for reduced returns, Ofwat has put pressure on water companies including Yorkshire Water to share the benefits of high leverage levels with customers. Ofwat in April announced proposals for water companies with debt higher than 60% of their RCV to share part of the benefit of the higher returns by reducing bills or increasing investment. Yorkshire Water’s debt is equal to more than 70% of its RCV.

Water companies with higher gearing must submit proposals on how it will share the benefit of this with customers by 3 September, Ofwat said today (3 July).

Water companies have also faced pressure from politicians, with Environment Secretary Michael Gove accusing them of paying excessive salaries and the opposition Labour Party threatening nationalisation.

DWS and Corsair declined to comment.