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Thames Water has received an offer from Covalis Capital that would see France’s Suez flown in to help manage the break-up of Britain’s biggest water utility before it goes public.
The proposal comes ahead of Thursday’s deadline for indicative bids for Thames, which is saddled with nearly £19bn of debt and is in danger of running out of cash in the new year.
UK infrastructure investor Covalis plans to sell off billions of pounds of the company’s troubled water assets – potentially including entire regions such as the Thames Valley – and then take the rest public, according to people familiar with the offer.
The UK government would have a “golden share” in the utility, giving it a board seat and other rights.
Covalis would provide around 1 billion pounds upfront once the deal is agreed, the people added. The London-based investor would then raise a further £4bn from asset sales, refinancing and listings, which are expected to take place over two to three years.
The Thames needs billions of pounds of investment to deliver water and sewerage services to its 16 million users in London and the surrounding areas, including £3.25 billion to continue operations and improve infrastructure by 2030.
Suez, which has contracts to manage water resources in France and employs 5,000 people in the UK, will act as an operating partner in the deal and will not own any shares in Thames Water under the deal it signed with Covalis.
Suez confirmed it was in an “exclusive” contract with Covalis to provide “a non-binding offer of advice and assistance to Thames Water”.
“At this stage, the scope of Suez’s work is limited to (one) advisory mission to ensure the success of the project and address the specific challenges facing Thames Water,” it added.
Thames warned that aging of assets pose a “public safety risk”, while its existing investors – which include pension funds Omers and USS, as well as China and Abu Dhabi sovereign wealth funds – have declared the deal “uninvestable”. They said they would withdraw their holdings, potentially suffering a loss of £5bn.
Final bids are due to be submitted in January after regulator Ofwat agrees the extent to which water companies will be allowed to raise bills. Thames Water has sought a 53 per cent increase in bills by 2030. Covalis believes its offer would succeed with a less generous Ofwat deal, as long as concessions can be made on fines and the pace of capital investment in the business, according to people close to the offer.
Other potential bidders include Hong Kong-based CK Infrastructure Holdings, which already owns Northumbrian Water, and Castle Waterco-owned by Conservative Party Treasurer Graham Edwards.
Castle Water would take a majority stake and also plans to eventually list Thames Water on the stock market. Scotland-based Castle Water completed the acquisition of Thames Water’s non-household arm in 2017 and now serves hundreds of thousands of businesses, charities and public sector groups.
Covalis’ offer relies on access to the water of the Thames Emergency loan of £3 billion which will provide the company with immediate liquidity and prevent it from running out of cash in the new year.
The water company arranged the loan with a group of its top “Class A” creditors, including US hedge funds Elliott Management and Silver Point, and it comes with an interest rate of 9.75 percent, rewards existing management and matures in two years. – a year and a half.
AND competitive, cheaper credit was brought forward by a group of junior class B bondholders. Covalis owns some of Thames Water’s class B bonds.
Covalis, Castle Water and Thames Water declined to comment.
