Fool's Eye View

[ September 25, 2000 ]

Thames confirms RWE as bidder

By Nigel Roberts (TMFNigel)

Chippenham, Wiltshire -- At last we now know who the mystery bidder is for Thames Water (LSE: TW.): German company RWE. The German "multi-utility company", has confirmed that it has offered 1215p for each Thames share, valuing the offer at £4.3 billion. The offer represents a premium of 32.8% over the closing share price of Thames on 19th September, and a premium of 50% above the average share price over the last twelve months of £8.10. Included in the sale is Thames' £1.8 billion pounds of debt, and so this increases the total cost to RWE to about £5.9 billion. Shareholders in Thames will also retain the rights to the final dividend of 32.7p declared by the company. You can read the press release on the RWE website.

According to Thames Chairman Roger Carr, the deal will create the world's third biggest water and sewage firm, and significantly strengthens Thames' prospects. The merger of Thames with RWE's water-related subsidiaries would create a company with 34m customers.

Mind you, all the speculation that has surrounded Thames and who the bidder was could have been answered by looking at the Thames Water discussion board, where Ledswinger suggested that RWE might look at Thames way back in November 1999.

Thames is an exciting acquisition for RWE: it has a wide spread of international operations, including projects in Australia, Chile, Malaysia and Thailand, and it is also in the process of buying E'town, the fourth largest quoted US water company, for £574m. When this has gone through Thames will supply 13 million customers overseas, more than the 11 million it supplies in the UK. RWE is Germany's biggest electricity company and the second-biggest utility.

Globally, the water sector is a highly fragmented industry, but French companies dominate, with Vivendi Environment and Suez Lyonnaise already exploiting consolidation opportunities in the United States and elsewhere. The rationale behind the takeover for Thames is that it is not really big enough by itself: by being taken over by RWE, which is one of Europe's biggest utility companies, it will have the critical mass to compete effectively. For RWE Thames is a big mouthful to swallow, and it is paying a high price. The offer values Thames at more than four times annual sales, which compares to the 3.5 times sales that Southern Co. and PPL Corp. offered to pay for Hyder (LSE: HYR). Mind you Hyder is a special case, being in a very weak condition as a result of its massive debts.

What now?

This offer really highlights the UK water sector, and we are likely to see continuing merger and acquisition activity. This will present a challenge to the water regulator (Ofwat), which has stated clearly that it wants to see a minimum of 10 different water companies operating under different ownerships; but 10 different companies may be too many for a small market like the UK.

Where Next?

RWE website
Thames Water discussion board
Water Sector discussion board
Office of Water Services (Ofwat) website