LONDON, England, Jan. 23, 2012 – China’s sovereign wealth fund, set up to invest the country’s multi-billion foreign exchange reserves, has bought a 8.68% stake into one of the UK’s largest utilities, Thames Water.
China Investment Corporation (CIC) said in a statement that it has acquired a 8.68% stake in the utility, which is owned by Kemble Water, a consortium of investors led by Australian bank Macquarie.
The investment follows English Chancellor George Osborne visiting China last week, who was quoted as saying: “This is a significant step by China. It is a vote of confidence in Britain as a place to invest and do business.”
In August last year another English utility, Northumbrian Water, agreed to a £2.4 billion takeover deal with a Hong Kong based investment consortium controlled by Cheung Kong Infrastructure Holdings.
Dr David Lloyd Owen, managing director of consultancy Envisager, told Water & Wastewater International magazine (WWi): “For the international investor, the English and Welsh asset owning water utilities are a fascinating paradox. Within each five year cycle, they represent stability and predictability with the cash flow necessary to fund hearty dividends and the cash needs to ensure a substantial and low risk debt market. In contrast, the run up to each AMP is a time of regulatory uncertainty.”
Owen added that the owners will still retain a majority stake in the utility.
He said: “The second sale of a stake in Thames Water in the past year would indicate that Macquarie has somewhat modified its original intention of having a major holding in Thames for decades. Even so, it will probably continue to hold a significant stake for some time to come.
“Like other water utilities the world over, the chief challenge lies in obtaining new debt finance as the money markets continue to contract. The strong track record of water-related debt helps, as seen in the significantly lower coupon on water related debt to almost all other industrial sectors, but we are some way away from 35-50 year bonds which were being issued in 2007.”
Commenting on CIC’s investment, industry analysts Frost & Sullivan research director Fredrick Royan, said: “The water utility services market still remain an attractive investment especially in stable water utility service markets such as the UK. The investment by CIC in Thames Water is also in a water utility that continues to perform relatively well at a time when water utilities appear to be buckling under some stiff efficiency related issues.”
On the question of whether utility operations can be affected if investor financial performances deteriorate, other commentators referenced the past case of Enron’s investment into Wessex Water.
Clive Mottram, head of water regulation at international law firm Eversheds, said: “As for the question of whether foreign investment in UK utilities makes good sense, the answer can perhaps be deduced from the collapse of Enron in 2001 who at the time owned Wessex Water. Wessex was unaffected by Enron’s demise and able to continue delivering water and sewerage services, as it was protected by the regulatory ring-fence contained in the licences of UK water companies.”
Mottram added: “This news can be seen as yet more evidence of the attractiveness of the UK water sector to investors. The acquisition also demonstrates that the Water White Paper, “Water for Life” published in December 2011 (see WWi article), has indeed successfully calmed water investors’ fears that regulatory change might reduce the sector’s attractiveness as a safe long-term return based on asset-intensive operations.
“Indeed, the timing of this acquisition perhaps suggests that the White Paper has provided a stimulus for investment, ahead of possible relaxation of merger controls which might allow greater consolidation of water businesses."