Take a look at the “temperature chart” of multiples being paid for UK water assets and – according to one infrastructure advisory professional who shared his views with Infrastructure Investor recently – you will currently observe a movement from “warm” to “hot”. It’s time, in his view, for investors to begin worrying about getting their fingers burnt.
Looking back at historic multiples adds some weight to this assessment. Studies from Credit Suisse and Deutsche Bank show premiums paid for UK regulated brownfield assets – including water – between 1999 and 2013. Three distinct phases can be observed.
In the first phase, between 1999 and 2004, most of the deals struck for UK water companies were at a discount rather than premium. The biggest discount (16 percent ) was seen when Malaysia’s YTL Power paid a reported £1.2 billion (€1.4 billion; $1.8 billion) for Wessex Water in 2002.
While Wessex faced particular circumstances as the British utility arm of failed US energy trader Enron, discounts were also seen at the likes of Welsh Water and Northumbrian Water. The only significant bucking of this trend was the 14 percent premium paid by Germany’s RWE when it acquired Thames Water for £4.8 billion in 2001.
The second phase, between 2004 and 2009, was a period of considerable volatility for water premiums – albeit that this was now exlusively an era of premiums rather than discounts. At the lower end of the scale, the sale of Suez’ remaining stake in Northumbrian Water to Ontario Teachers Pension Plan in 2005 came with a 3 percent premium while, at the upper end, the sale of South Staffordshire Water to Alinda Capital Partners by Arcapita in 2007 implied a 36 percent premium. On average, premiums paid during this period were around 20 percent.
Moving onto the third phase between 2009 and 2013, it can be seen that a narrowing of the range of premiums occurs within a small band between 17 percent at the lower end and 30 percent at the upper end. For example, the June 2012 sale of a 90 percent stake in Veolia UK to Infracapital and Morgan Stanley Infrastructure Partners came with a 26 percent premium. The typical premium was around the low to mid-20s.
Some of the most recent UK water deals are not included in the statistics, but there is talk of multiples moving up above 30 percent and towards 40 percent. Even allowing for the low cost of capital and modest return expectations characteristic of the new breed of institutional acquirers, the question has to be asked whether such deals are becoming a little too risky – especially with a regulatory review just around the corner.