The potential new owner of Thames Water will make a “binding” commitment not to extract dividends from the company, in an attempt to reassure regulators, ministers and customers that it can turn the business around.
KKR, the American private equity firm, is prepared to make its no-dividend pledge as part of a formal offer to take a majority stake in the business, should it reach an agreement with the company’s board and creditors who hold about £12 billion of Thames’s debt.
A source close to KKR said it did not believe that extracting cash from a company that has been starved of investment would help achieve a turnaround, nor would it be acceptable in the eyes of the public. Outrage at the decrepit state of Britain’s water companies and the levels of sewage in rivers has reached a fever-pitch, with the focus falling on investors who have taken large dividends out of companies.
KKR’s intention is to hold Thames for up to ten years, the length of time that the firm believes it will take to effect a turnaround. It would then target a stock-market listing, at which point it would hope to make a return from its investment.
The firm, immortalised in the book Barbarians at the Gate about its role in the 1980s takeover of RJR Nabisco, has been selected as the preferred bidder for Thames. It already owns a stake in Northumbrian Water and this year bought Dawsongroup, a British-based asset leasing company.
It is understood that KKR believes it needs £3 billion to £4 billion of fresh money, or equity, up to half of which could come from existing creditors. Thames’ creditors with the higher form of security — known as Class A — have been told to expect losses of at least 20 per cent on their loans as the price for putting the company on a sounder financial footing. Class B holders will be wiped out. KKR will offer creditors the chance to join as new investors in the company but they will not be allowed to turn their debt into equity, as might have been the case in a conventional restructuring. However, some bond holders will be offered a debt for equity swap after requesting the opportunity.
The US private equity firm is thought to want to seal a deal by the summer and is not expected to challenge Ofwat, the industry regulator, over its price determination for the company.
Ofwat has powers to determine how much water companies can spend on their infrastructure and how much they can charge customers over five-year periods. In December it concluded that Thames could increase bills by 35 per cent. This was rejected by the company’s management team, which had sought to appeal against the settlement. The appeal is on hold while new investors are sought.
It is thought KKR would prefer the certainty of the existing Ofwat price determination over an appeal, which could last another year.
City sources said that while Thames attracted six bids, only three were realistic including one from the Chinese conglomerate CK Infrastructure, which owns Northumbrian Water with KKR, and is understood to still be interested in Thames.
