KKR drops out of Thames Water rescue deal

Unlock the Editor’s Digest for free

Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

KKR will not proceed with a planned deal to inject £4bn of equity into Thames Water, throwing the future of Britain’s largest water utility into doubt on a day that the sector’s troubles were underscored by an official review.

Thames Water had selected the US private equity firm in March as its preferred partner for a recapitalisation deal, under which KKR would take over the near-insolvent utility and rescue it from the brink of nationalisation.

However, Thames Water said on Tuesday that “KKR has indicated that it will not be in a position to proceed, and its preferred partner status has now lapsed”.

KKR’s decision adds to uncertainty over Thames Water, which is struggling under the weight of its £20bn debt mountain and has been trying to fend off renationalisation under the government’s special administration regime, or SAR.

The company’s problems have underscored wider issues for the country’s water sector. A government-commissioned review on Tuesday recommended an overhaul of the sector’s regulatory system.

Thames Water has been discussing in parallel a backup recapitalisation plan with its senior lenders. The utility said on Tuesday that it “intends to progress discussions” on this plan with water regulator Ofwat and “other stakeholders”.

One person close to the senior bondholders said that they had already submitted detailed plans for their own deal to the regulator, including a proposed management team to run the struggling utility.

“Whilst today’s news is disappointing, we continue to believe that a sustainable recapitalisation of the company is in the best interests of all stakeholders and continue to work with our creditors and stakeholders to achieve that goal,” said Sir Adrian Montague, Thames Water chair.

KKR declined to comment.

Steve Reed, environment secretary, stressed that Thames Water remained stable and that a “market-led solution” remained “on the table”.

“We are ready to intervene through a SAR should this be required to ensure the continued provision of vital services,” he told parliament after an urgent question was tabled by the opposition on Tuesday.

The utility’s senior creditors earlier this year provided an up to £3bn loan to give the company the funding needed to work out a wider rescue deal. Its previous owners, including pension funds and sovereign wealth funds, walked away from the business last year, declaring it “uninvestable”.

Montague told MPs last month that the company’s financial situation had been “hair-raising” and that it had only five weeks’ cash left at some points in the past year.

KKR carried out 10 weeks of intensive due diligence on a takeover, including multiple site visits to water and waste treatment facilities in and around London.

One person close to KKR said that it had not been able to thrash out a deal given the complexity of the situation and the “multiple stakeholders” involved.

The firm’s preliminary bid envisaged £4bn of fresh funds being injected into the utility, with Thames Water’s lenders offered the opportunity to participate in the deal.

The Financial Times has previously reported that while KKR was not looking to renegotiate the price of water bills, it was hoping to persuade Ofwat to lower fines imposed on the business for previous failings.

Ofwat last week announced it would fine Thames Water £123mn for breaking the rules on its waste water operations and for paying millions of pounds in dividends despite the company’s poor performance.

Thames Water drew interest from six bidders in the previous round of its equity raise process, including Hong Kong’s CK Infrastructure. Some of those bidders may now look to revive their takeover proposals.

Castle Water, which supplies water to businesses, said on Tuesday that it was “ready, willing and able to support the business with the requisite financing in place and can move quickly to provide Thames with the operational and financial support it requires”.

Thames Water’s latest travails came as an official review of the water industry recommended an overhaul of Ofwat, saying the current regulatory system has “largely lost public trust”. 

The Independent Water Commission said in an initial report that ministers should reform Ofwat to give it a “more supervisory approach”, with earlier, more active engagement to address risks.

The commission, led by Sir Jon Cunliffe, former deputy governor of the Bank of England, said Ofwat’s current approach placed “excessive reliance” on modelling based on historical sectoral benchmarking.

It recommended that the regulator adopt more company-specific assessments and place more emphasis on the supervision of individual companies.