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Allianz, DIF and HICL shun Brexit to seal £687m water deal

Infracapital and Morgan Stanley’s sale of Affinity Water is the latest in a series of transactions in the UK water sector in recent months.

A consortium comprising Allianz Capital Partners, HICL and DIF Infrastructure IV has agreed a deal to buy UK-based Affinity Water for £687 million ($886 million; €811.4 million).

ACP and HICL have each taken a 36.6 percent stake in the company, paying about €269 million for the share. DIF, which said it initiated the deal, holds the remaining 26.9 percent of the water firm previously 90 percent owned by Morgan Stanley Infrastructure and Infracapital. A 10 percent share owned by French group Veolia, which founded Affinity Water, has also been bought by the consortium.

The sale comes less than two months after the owners initiated a strategic review of the business, evaluating whether to sell part or all of the company. However, Infrastructure Investor understands Affinity Water had not yet been put to the market by its owners when DIF sourced the deal.

Affinity, previously known as Veolia Water Central, was bought in June 2012 by Morgan Stanley and Infracapital for an enterprise value of £1.24 billion. While an updated figure cannot be disclosed at present, with Affinity yet to release its 2016/17 accounts, sources close to the matter said interim results point towards an enterprise value for the latest deal of about £1.56 billion.

The consortium’s agreement is the latest in a wave of recent deals in the UK’s water industry. Borealis and Wren House bought Macquarie’s 26.3 percent ownership of Thames Water in March, in a deal believed to be worth up to £1.4 billion, while Fiera Infrastructure and QSuper have also increased their ownership of the company in the past couple of months. These deals followed Hastings’ investment in South East Water in February and iCON Infrastructure Partners III’s majority buyout of Bristol Water in December.

A report from Moody’s in October stated that while UK water firms can bank on stable revenues over the next 12 to 18 months, continuing low interest rates and regulatory developments towards further competition could significantly reduce their income after the 2019 price review.

“The UK water sector offers a well-established and transparent regulatory framework that provides Allianz good visibility and a fair return on its investment”, said Christian Fingerle, chief investment officer at ACP. “The investment in Affinity Water is another important step in our ambition to grow our portfolio of high-quality core infrastructure assets.”

However, while the Moody’s report stated there should be only limited impact from Brexit, it argued cheap loans currently received from the European Investment Bank could dry up once the UK leaves the European Union in 2019. Despite this, Fingerle added that ACP sees the UK “as a stable jurisdiction in which to invest capital”.