Following a brush with collapse, nationalisation and a fundamental shift in the water sector, it appears as if England’s largest water company seeks a return to business as usual in the form of a private equity partnership.
Whilst this is not strictly a case of “meet the new boss, same as the old boss” the connections between Thames Water’s preferred partner KKR and their previous owners in the Macquarie Group are somewhat remarkable.
According to a report by Reuters, KKR was the preferred option of the six potential bidders, although an agreement is unlikely before June 2024, as the parties enter a period of due diligence and seek approval for the sale from the regulators of the water sector.
What does this mean, what will it change in the short term and is there cause for concern in the long term?
Will The New Ownership Change Anything Immediately?
For business water customers, the change in ownership should change very little on the surface; Thames Water has a binding obligation to provide water service, and if it fails to do so, it will be subject to fines, prosecutions or a potential special administration.
This is true now and will not change unless the fundamentals behind the private water sector change. The water rate increases have already been set and unless there is an extraordinary turnaround in terms of performance, are unlikely to be increased further.
What could change, however, is the priorities of the company in the long term, particularly with infrastructure demands looming and water bills from 2030 onwards.
Who Are KKR?
The preferred partner for Thames Water is Kohlberg Kravis Roberts & Co, a private equity firm known simply as KKR.
Known as leveraged buyout specialists, where huge companies are bought using borrowed money secured against the company itself, KKR became known as the “Barbarians At The Gate”, named after a 1989 book and 1993 TV show chronicling their buyout of biscuit and tobacco firm RJR Nabisco.
This buyout, the largest in history up until that point, reflects the priorities of a company where the priority is ultimately profit, and there are concerns that a very similar approach will be taken with Thames Water right after the consequences of their last dalliance with private equity has become clear.
What Is KKR’s Bid Preferred?
KKR wants a stake in Thames Water worth £4bn, which would provide the company time and resources to execute a turnaround plan, establish a more solid financial foundation, and reduce the scale of the “haircut” class A investors are expected to pay.
At this early stage with other details yet to be addressed, this part of the deal is the priority, and has made it preferable to the bondholders most in control of the process compared to ones by Castle Water, CKI Infrastructure and Covalis’ consortium bid.
Thames has, somewhat vaguely, noted that their priority is financial stability, executing its turnaround plan and “delivering a market-led solution” rather than being placed in special administration.
What Are The Concerns With KKR’s Bid?
Thames Water has not had a particularly good history with private equity; in fact, some have made the argument that the reason why Thames are in the situation they are in is as a direct result of a private equity group ladening the company with enough debt to put it in an existential crisis.
In 2006, the Macquarie Group, an Australian investment bank and private equity firm, bought Thames Water, but between then and 2017 accumulated over £10bn in debt, £2bn of which was, according to allegations made by the BBC, was for the benefit of the bank itself.
This debt has spiralled since 2017 to a total of over £19bn, as short-term loans and assumptions of more debt have been used to pay loans, bonuses to executives and dividends to shareholders.
There are concerns that this will lead to “business as usual” at a time when the water sector is facing more criticism than ever before for limited and poor performances.
A Problem Of Trust
Thames Water have stated that they want further price rises, and whilst their appeal to the Competition And Markets Authority was deferred as they navigated the High Court for a £3bn loan that would stop the company from collapsing in March 2024, customers are naturally unhappy with the audacity.
Private equity ownership has been blamed for the lack of investment in ageing infrastructure, and whilst Thames Water want to increase prices again, customers are understandably sceptical that this funding will be used to service debt and continue a cycle started in 2006.
