KKR Infrastructure and its co-investors are in talks about selling their 75% stake in South Staffs Water to Arjun Infrastructure Partners, a deal that could value the asset in excess of GBP 600m.
Two sources said the infrastructure investor has approached KKR about the stake, with one saying that KKR is running a bilateral process with Arjun. Other sources said they were aware the KKR stake is up for sale but did not name potential buyers.
Arjun and KKR declined to comment.
KKR and its co-investors bought South Staffs, which supplies water to around 1.3m people and 35,000 businesses in South Staffordshire and neighbouring areas, from Alinda Capital Partners for an enterprise value of GBP 564m in 2013 and sold a 25% stake to Japanese conglomerate Mitsubishi in 2016.
South Staffs, which does not provide wastewater services but also owns Cambridge Water, a supplier to around 319,000 people in the Cambridge region, reported a Regulated Asset Value (RAV) of GBP 347.6m in its last full year results. Unlike most water companies, a large part of South Staffs’ revenue and profit is from unregulated activities, which are not used to calculate RAV.
South Staffs reported adjusted Ebitda of GBP 81.9m for the year ended 31 March 2017, down slightly from GBP 82m the previous year on revenue up to GBP 248m from GBP 234.9m. Earnings were held back by higher power costs, the company said. Non-regulated activities accounted for just over half of revenue in both years.
South Staffs’ non-regulated business includes Echo Managed Services, a provider of water billing services for seven UK water companies, and contractor SSI Services.
South Staffs’ total revenue was GBP 205m in 2013, the year it was bought by KKR.
A South Staffs stake sale would be the latest in a series of deals in the water sector since Ofwat in December outlined its PR19 methodology, which will reduce permitted cost of capital for the period from 2020 to 2025 to 2.8% from 3.6% for the current five-year period.
Infrastructure investor Ancala last month announced the acquisition of Portsmouth Water from the latter’s employee benefit trust and individual shareholders. Also last month, Canadian pension fund investor OMERS Infrastructure increased its stake in Thames Water by 4% to 32%.
Prices for the deals were not disclosed, but are likely to have been held back by the reduced returns that are looming from 2020, as is the price for any South Staffs transaction. Last month HICL Infrastructure Company said it expects a reduction in the valuation of its 33.2% stake in southeast England-focused Affinity Water because PR19 “may adversely impact Affinity Water’s business plan.”
KKR’s other infrastructure investments include Austria-based rolling stock lessor European Locomotive Leasing (ELL) and Saba Infraestructuras, a car park operator that was spun out of Spain’s Abertis.
Arjun’s portfolio includes stakes in UK motorway service station operator Welcome Break and Isle of Wight ferry service Red Funnel. Global Environmental & Infrastructure Business Group.
Mitsubishi’s infrastructure activity is run and managed by its Global Environmental & Infrastructure Business Group. Investments include stakes in Canberra Light Rail and Cube Highways in India.