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Thames Water has received a bid from Covalis Capital that would see France’s Suez flown in to help manage a break-up of the UK’s largest water utility before listing it on the stock market.
The proposal comes ahead of Thursday’s deadline for indicative bids for Thames, which is saddled with nearly £19bn of debt and risks running out of cash in the new year.
UK infrastructure investor Covalis plans to sell off billions of pounds of the troubled water company’s assets — including, potentially, entire regions such as the Thames Valley — and then publicly list the remaining rump, according to people familiar with the bid.
The UK government would hold a “golden share” in the utility, giving it a seat on the board and other rights.
Covalis would provide about £1bn up front on agreement of the deal, the people added. The London-based investor would then raise another £4bn from asset sales, refinancing and the listing, which is expected in two to three years’ time.
Thames needs billions of pounds of investment to provide water and sewerage services for its 16mn customers in London and the surrounding areas, including £3.25bn to keep running and make infrastructure improvements by 2030.
Suez, which has contracts to run water assets in France and employs 5,000 people in the UK, would act as the operating partner on the deal and would not own any shares in Thames Water under the agreement it has signed with Covalis.
Suez confirmed that was in an “exclusive” deal with Covalis to provide a “non-binding offer to advise and assist Thames Water”.
“At this stage, Suez’s scope of work is limited to [an] advisory mission to ensure the project’s success and address the specific challenges faced by Thames Water,” it added.
Thames has warned that its ageing assets pose a “risk to public safety”, while its existing investors — which include the pension funds Omers and USS, as well as the Chinese and Abu Dhabi sovereign wealth funds — have declared the business “uninvestable”. They have said they will withdraw their ownership, potentially taking a £5bn loss.
Final offers are due to be submitted in January after regulator Ofwat has agreed the extent to which water companies will be allowed to raise bills. Thames Water has asked for a 53 per cent increase in bills by 2030. Covalis believes its bid would work with a less generous agreement from Ofwat, so long as concessions could be reached on fines and the pace of capital investment in the business, according to people close to the bid.
Other potential bidders include Hong Kong based firm CK Infrastructure Holdings, which already owns Northumbrian Water, and Castle Water, which is co-owned by Conservative party treasurer Graham Edwards.
Castle Water would take a majority stake and also plans to ultimately list Thames Water on the stock exchange. Scottish-based Castle Water completed the buyout of the non-household arm of Thames Water in 2017, and now serves hundreds of thousands of businesses, charities and public-sector groups.
Covalis’s bid relies on Thames Water accessing a £3bn emergency loan that will provide the company with instant liquidity and prevent it from running out of cash in the new year.
The water company has agreed the loan with a group of its most senior “class-A” creditors, including US hedge funds Elliott Management and Silver Point, and it comes with an interest rate of 9.75 per cent, rewards existing management and matures after two-and-a-half years.
A rival, cheaper loan has been put forward by a group of lower-ranking “class-B” bondholders. Covalis owns some of Thames Water’s class-B bonds.
Covalis, Castle Water and Thames Water declined to comment.