Barbarians at the sewer gate. Sometimes the headlines write themselves. It’s just that with KKR’s putative purchase of Thames Water they look, almost deliberately, wrong.
Thames is not in a position to be overly choosy about its future owner. Drowning in £16 billion of net debt, the operating company is only afloat after a bruising court battle to secure up to £3 billion of emergency loans. The previous shareholders have been wiped out without taking a dividend since 2017. The regulator, Ofwat, is so dysfunctional it’s under government review. And, apart from the warring A and B creditors, the first thing any proposed new owner will have to deal with is £1 billion of fines for past efforts on the pollution front.
True, Thames does have 16 million captive customers in London and the South East. But if KKR really is willing to pump in £4 billion of equity and sort out the mess, it probably deserves a better reception than the one it’s got so far: brickbats harking back to Kohlberg Kravis Roberts’s takeover of a biscuit group, RJR Nabisco, in 1988.
Today, KKR is far more than a buyout business. Valued at just over $100 billion, the New York-listed group has $195 billion of assets in private equity. But that’s topped by the $246 billion in credit, while it also has $79 billion in real estate and $80 billion in the bit pertinent to Thames: an infrastructure wing that, over here, has invested more than £20 billion. That includes ownership of John Laing, Smart Metering Systems and the energy-from-waste outfit Viridor, as well as 25 per cent of Northumbrian Water alongside Li Ka-shing’s CK Group.
Crucially, KKR has the clout to stand up to Thames’s biggest class of creditors, the As, and get a workable deal. They hold £16 billion of face-value debt, trading at 75p in the pound, with £12 billion of that represented by a creditor group of 100-plus institutions: an eclectic bunch spanning BlackRock and Aberdeen and the hedge funds Elliott and Silver Point.
As Thames’s update on its preferred bidder inferred, KKR’s bid implies “a material impairment of the class A debt”. Thames didn’t even mention the £1 billion held by the B class, trading at a pittance, or the debt in the top company Kemble. The hint? That bidders want that written off entirely: a key reason for all the Bs’ legal dramas.
Some reckon KKR got preferred bidder because it’ll go easier on the As. But, while it wants to avoid a legal fight, two things are clear. First, it wants significant control, both financially and operationally — unlike under Thames’s previous shareholders, a consortium of nine largely passive funds. Second, that KKR reckons the market value of the debt is the right starting place for negotiations with the As.
It expects that sort of writedown, leaving Thames with about £12 billion of debt and gearing of a sensible 60 per cent against its £20.2 billion regulatory capital value. The question is how much equity creditors would expect to take for playing ball, with some potentially swapping slivers of equity for higher debt write-offs. Still, there is a deal to be done. KKR, which knows any Thames turnaround will take two five-year regulatory periods, can live with Ofwat’s allowed 35 per cent rise in customer bills. But it wants the regulator to defer the £1 billion of historic fines or maybe agree undertakings in lieu. That would stop a big chunk of equity vanishing out of Thames the moment it bought it. Again, not impossible.
There are tricky negotiations ahead. But get those sorts of deals and Thames could find itself in the hands of a wealthy owner, whose infrastructure funds typically hold assets for seven to ten years. And one whose business plan is not built on taking out dividends but an operational fix that it hopes will see an eventual capital return via a stock market float. Compared to the costly mess of special administration, KKR could prove just the barbarian Thames needs.
Stamp out duty
A familiar tale from Peel Hunt. Its head of research, Charles Hall, has crunched the numbers for the first quarter of this year. And guess what? There have been 15 bids of at least £100 million for UK-listed companies, together totting up to an equity value of almost £9 billion, but nothing at all to “refill the hopper”: not a single IPO running into three figures.
The upshot? The likes of Dowlais, Alliance Pharma and Assura could all be vanishing from London’s shrinking stock market. But even watering down the listing rules hasn’t yet persuaded newbies to take their place. Meantime, Rachel Reeves is badgering pension funds to invest more in UK companies: do hurry while stocks last. But as Hall notes, “there have been outflows for 44 of the last 45 months”.
How to square this circle? Well, abolishing stamp duty on share trading, typically levied at 0.5 per cent, would arguably have the greatest effect — not least when Donald Trump keeps giving people reasons not to invest in America. Sure, such a fillip to liquidity would cost £4 billion-plus a year, so may be beyond our skint chancellor. But financial services, built on the London market, are a big part of the UK economy. There are worse ways to get growth.
Europe strikes back
Who needs Trump tariffs? One car company is on the skids even before they come in. Yes, Tesla, whose sales in France, Denmark, Sweden and the Netherlands have fallen for the third month on the trot, mainly thanks to a consumer boycott over Elon Musk’s attachment to his orange friend. Thanks to home production of cars sold in America, Tesla will escape the worst of Trump’s tariffs. Nice to see European punters making up for that, though.
