Covalis Capital, an infrastructure investor, has submitted a £5 billion ($6.4 billion) bid to acquire Thames Water, a struggling UK water company facing financial difficulties. This bold move comes as Thames Water urgently seeks funding to avoid insolvency.
Covalis’s proposal involves an initial investment of £1 billion, followed by raising an additional £4 billion through asset sales, refinancing, and a potential stock market listing. The bid also includes a partnership with French water management company Suez, which would act as an operating partner, leveraging its expertise in technical advisory and organizational optimization. This strategic alliance aims to address the operational challenges faced by Thames Water and contribute to the project’s overall success.
The proposed plan includes a comprehensive review of Thames Water’s business, potentially leading to asset divestitures before listing the remaining entity on the stock market. The UK government would retain a “golden share,” granting it special rights, including a seat on the board, ensuring a level of oversight and influence in the company’s strategic direction. This approach aims to balance private investment with public interest in this critical infrastructure asset.
Crucially, the Covalis bid safeguards the interests of Thames Water’s Class A debt holders, ensuring no haircuts on their investments. However, the proposal seeks a consensual restructuring with holders of the more junior Class B liabilities, potentially involving negotiations on repayment terms and conditions. This differentiated approach reflects the varying levels of risk associated with different debt classes.
Thames Water, facing significant financial pressures, set a deadline for indicative bids, requiring a minimum of £3.3 billion in new equity. Existing shareholders had previously deemed the business “uninvestible,” highlighting the urgency of securing new funding. Without a successful capital injection, Thames Water faces the prospect of special administration, a form of temporary nationalization.
Competing bids have emerged, including a proposal from Castle Water Ltd, which previously acquired Thames Water’s non-household water and sewerage business. Castle Water’s bid involves a £4 billion equity injection, presenting an alternative path to recapitalizing the struggling utility. However, some potential investors, including CK Infrastructure Holdings, Carlyle Group Inc., and Brookfield Asset Management Ltd., have opted out of the bidding process, citing concerns about unclear returns and the ongoing debt restructuring.
The regulatory landscape further complicates potential rescue deals. Ofwat, the water regulator, will determine the allowed equity return for the next five years in December. Thames Water may challenge this ruling, potentially prolonging the uncertainty. Additionally, a court hearing is scheduled to approve £3 billion in emergency debt funding, providing short-term liquidity but requiring a more comprehensive restructuring in the future, potentially involving creditor haircuts. The complex interplay of financial and regulatory factors underscores the significant challenges in securing a sustainable future for Thames Water.
In conclusion, the fate of Thames Water hangs in the balance as various bids are considered. The Covalis Capital proposal, with its significant financial commitment and strategic partnership with Suez, offers a potential lifeline. However, the complex financial situation, ongoing debt restructuring, and regulatory uncertainties present significant hurdles. The outcome of this bidding process will have significant implications for the future of water services in the UK.
