Consortium launches “lofty” £2.2bn takeover for AWG

3i consortium will have to work hard to make bid premium pay in its proposed takeover of Anglian Water’s UK owner, according to broker Collins Stewart.

AWG, owner of the England and Wales’s largest water company Anglian Water, has recommended a £2.2 billion ($4.1 billion; €3.2 billion) cash takeover offer, which Collins Stewart, an independent broker, said was a “lofty 18 percent” above its valuation of the business.

It said in a research note that the agreed bid by a consortium made up of Canada Pension Plan Investment Board, Colonial First State Global Asset Management, Industry Funds Management and buyout firm 3i could only be justified “if the bidders have a lower cost-of-equity assumption about the water sector than does the market.”

This, it said, would need to be down close to the cost of debt.

“Anglian Water’s recent trading update only cemented our opinion the financial benefits of private equity ownership versus market holding is negligible. The financial buyers can do very little to add value,” it said in the note, adding that in this case financial holders may be better buying stakes in the market rather than paying bid premia.

Freshfields Bruckhaus Deringer, a law firm, is advising the consortium on the takeover offer.

AWG’s principal subsidiary is Anglian Water, serving approximately 5.4 million customers. It also owns Morrison, a support services business focused on the facilities services and utilities services sectors, and AWG Property, a property development and management business.