KKR offloads remainder of UK water group to Arjun

The sale of South Staffordshire comes five years after its initial £563m investment and two years after it sold 25% of the company.

KKR has fully exited its investment in UK-based water company South Staffordshire following a deal with funds advised by Arjun Infrastructure Partners.

Arjun has bought 75 percent of South Staffordshire on behalf of a group of pension funds and other institutional investors, ending KKR’s interest in the group following its investment in May 2013.

Investing through its debut $1 billion infrastructure fund, KKR bought South Staffordshire from Alinda Capital Partners for an enterprise value of £563.7 million ($806.4 million; €652.1 million) and a 7.2 times EBITDA multiple, according to documents from the Stanislaus County Employees’ Retirement Association. The firm subsequently sold a 25 percent stake in South Staffordshire to Mitsubishi Corporation in February 2016 for £103.5 million.

KKR and Arjun declined to disclose the price for the latest deal.

The transaction comes at a time of significant transformation for the UK water industry, with regulator Ofwat ordering companies to lower their cost of capital to 2.4 percent RPI, a new record low. However, unlike most UK water companies, South Staffordshire, which supplies water to around 1.6 million customers in the region, has a significant source of non-regulated activity. That activity, which is providing contractual specialist services primarily to the UK water sector, accounted for 22 percent of its operating profit last year. The company generated an £81.9 million EBITDA in 2017, down slightly from £82 million the previous year.

South Staffordshire is the third water divestment from the KKR Global Infrastructure Investors fund. The vehicle last year sold US-based Bayonne Water and Middletown Water to Argo Infrastructure Partners for a combined $170 million. The sales netted respective gross IRRs of 36 percent and 61 percent and money on invested capital of 2.8 times and 3.3 times, according to pension fund documents.

The fund had, as at December last year, returned 83 percent of invested capital to LPs and is currently attempting to realise its investments in Spanish car parking group Saba and renewables company Acciona. KKR is also fundraising for its third fund, targeting $5 billion.