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Thames Water has selected the US private equity group KKR as its preferred bidder to take control of the UK’s largest water utility and aid its battle against renationalisation.
KKR, which is already a shareholder in Northumbrian Water, had submitted a preliminary £4bn bid to take a majority stake in Thames Water earlier this year.
The decision means that interest from rival suitors including Covalis, Castle Water and CK Infrastructure will not be taken forward at this stage, according to a person close to the company.
Thames Water, which serves 16mn people across London and the Thames Valley, has been hurrying to raise new equity after its pension and sovereign wealth fund owners walked away from supporting the utility last year and declared it uninvestable, sparking a financial crisis.
The company, which is the UK’s largest water utility, is struggling under £20bn of debt and is in dire need of extensive infrastructure upgrades to its creaking network. On Friday Alastair Cochran, the group’s finance director, announced his unexpected resignation.
Thames Water said on Monday that after assessing proposals received, it had chosen KKR “to enter the phase 2 diligence stage” of its equity-raising process as preferred partner. There was no certainty that a binding proposal would be made by KKR, the utility added.
KKR’s proposal included a “material impairment” to the utility’s top-ranking class A debt, which is held by US investment groups such as Elliott Management and Pimco as well as British asset managers such as Aberdeen, Thames Water said.
The US private equity group has discussed offering these bondholders the opportunity to invest in Thames Water’s equity in exchange for a writedown, according to people close to the discussions. KKR is also said to have proposed less severe haircuts to bondholders than CKI.
The company is seeking to agree an equity deal by June, with final sign-off due by September in a process run by the investment bank Rothschild.
While Thames Water has agreed an up to £3bn loan from its class A bondholders to avert a cash crunch, it needs approval from bondholders to access the money ahead of a potential legal challenge. The deadline for this approval process falls later on Monday with the utility expecting to be able to begin drawing on the loan in early April.
The loan could then be subject to a further challenge in the Supreme Court from a rival creditor group or environmentalists led by the Liberal Democrat MP Charlie Maynard.
KKR has a 25 per cent stake in Northumbrian Water, which is appealing to the UK’s Competition and Markets Authority over its pricing settlement with the water regulator Ofwat. Thames Water had also announced an appeal over the extent to which it could raise customer bills, but subsequently delayed it so as not to slow down the equity raise process.
Ofwat said in December that Thames Water could increase bills by 35 per cent by 2030 — which meant household bills would rise by £151 to £639 on average this year.
