Macquarie Bank's acquisition of Thames Water has raised the bar for other buyers thirsting after reliable revenue generating assets.
Australia's Macquarie Bank, together with a group of unnamed investors, has bought Thames Water for £4.8b plus £3.2b in debt. The water utility, which is owned by Germany's RWE, supplies water to about 13 million people in London and the Thames Valley. It came into existence in 1974 when ten regional water companies were created through the Water Act of 1973. It was subsequently privatised by the then Conservative Government in 1989, and later bought by the German multi-utility firm RWE in 2001.
Today's deal marks the end of a bidding battle that has attracted interests from a number of parties. These included buyout specialist Guy Hands and the Qatar Investment Office. And for Macquarie Bank, the acquisition represents another business to add to its burgeoning portfolio of assets. Its other UK businesses include Birmingham and Bristol Airports plus the M1-A1 Link and M6 toll roads. Additionally, through Arqiva, Macquarie Bank also owns the media company formerly known as ntl: broadcast. It was also interested in buying London Stock Exchange
(LSE: LSE)
and BAA, which was eventually sold to Spain's Ferrovial.
The deal to buy Thames Water highlights the thirst by investment and pension funds for reliable revenue generating assets. What's more, the deal has effectively raised the bar for bidders interested in other water companies. In the year ended 31 March, Thames Water posted profits of £246m. This values the company at 19 times historical earnings. And only last week, venture capitalist 3i
(LSE: III)
raised its offer to £2.3b for AWG
(LSE: AWG)
, which owns Anglian Water. It seems that 3i is prepared to pay a jaw-dropping 21 times prospective earnings, or a premium of 20% to the quoted water sector, to ward off rival bids.
It strikes me that the water sectors's erstwhile low valuations and juicy yields may be quickly evaporating. Nevertheless, investors have woken up to the fact that potable water is a commodity in the same way that gold, copper, zinc and silver are commodities. But what makes water special is that it is largely unaffected by economic cycles. Put another way, we all need clean, drinkable water all the time, and demand for the wet stuff is increasing. Additionally, there are no known substitutes, and to me that makes water companies that include Kelda
(LSE: KEL)
, Pennon
(LSE: PNN)
and Northumbrian Water Group
(LSE: NWG)
good long-term bets.
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