Thames Water: What next after KKR walks?
Thames Water was dealt a crushing blow this morning after its preferred bidder, the US private equity giant KKR, abruptly withdrew from its pursuit of the embattled utility.
The decision leaves the UK’s largest water supplier without a buyer and puts it back on the brink of administration.
It follows just a week after it was hit with a record fine of £123m by Ofwat for dividend payments and failures at its wastewater operations.
Environment secretary Steve Reed said on LBC this morning Thames itself “remains stable” and there would be “no disruption to water supply.”
What next?
There have been so many twists and turns in the saga, with Thames already narrowly averting administration via a £3bn emergency loan earlier this year.
It is again staring down the barrel of an administration process, which would see the company taken into what is known as special administration regime (SAR) to ensure the taps continue to flow.
Under process, Thames would be put under temporary state supervision, much like the kind of insolvency solution that bankrupt firms undergo if they provide essential services.
Executives claim they have contingency plans in place already and the government has made preparations for this outcome.
However, the utility said on Tuesday it intended to take forward discussions with “certain senior creditors” on a back-up rescue plan alongside the water regulator.
A debt-for-equity takeover would see bondholders take a stake in the company in return for writing down a significant portion of its substantial debt pile.
Ofwat is understood to be looking at 400 pages of proposals for new equity and debt facilities, according to Sky News.
The environment secretary would not be drawn on details of any plans this morning, but said Thames was in talks with “a number of people.” This is likely its last chance to avert administration.
Another option could be that Thames runs back to one of Thames’ six other takeover offers it received as part of an equity raise in March. Among the most likely would be Hong Kong’s CK Infrastructure, the owner of Northumbrian Water, whose £7bn bid for the utility was rejected in February.
Castle Water, a small water firm that bought Thames’ non-household water business in 2016, has also confirmed it is ready to renew its own £4bn equity bid for the entire business. Its original offer, first reported by Bloomberg, was rejected in favour of KKR’s bid.
KKR’s sole bidder status for Thames Water questioned
Whatever the case, Thames Water bosses are in for another round of backlash.
Executives made the questionable decision to select KKR as the sole preferred bidder in the early stages of negotiations, leaving the company vulnerable if things turned sour.
That came despite opposition from Ofwat and concern surrounding the US private equity firm’s lack of experience running a major UK utility company.
Responding to the announcement on Monday, Alistair Carmichael MP, Chair of the EFRA committee, said: “In our evidence session with Thames Water bosses in May we raised serious concerns that Thames had only pursued one bidder at an early stage for its takeover bid and highlighted the risks this could pose if KKR chose not to proceed. Unfortunately, our concerns have been realised, putting Thames in a perilous position.
He added: “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”.
Reed makes ‘no apology’ for tackling water companies
The reasons for KKR abandoning the deal remain as yet unclear.
Speaking in the Commons, Conservative shadow environment secretary Victoria Atkins accused ministers of having “talked themselves out of” a Thames Water rescue deal.
Citing an unnamed source from KKR, she alleged one of the reasons the private equity firm pulled out was due to the “negative rhetoric” directed at Thames Water by the environment secretary Reed.
She asked what involvement Reed had in phone calls between KKR and Downing Street, and also if the government’s options “include a plan for temporary renationalisation?”
Reed replied: “This government stands ready for all eventualities but I will make no apology for tackling the poor behaviour of water companies and water company executives that took place under the previous government and that we are correcting.
“I mean, we even had stories that have been confirmed by water companies of previous conservative secretaries of state shouting and screaming at water company bosses but not actually changing the law to do anything about the bonuses that they were able to pay themselves.”