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Power play threatens AXA and Cube’s investment

A takeover proposal from a French investor could trigger the refinancing of some €2bn of debt for France’s third-largest water company, SAUR, in which AXA and Cube are stakeholders. That could significantly increase the cost of SAUR’s debt, potentially endangering the utility, shareholders argue.

A takeover bid by one of the biggest shareholders in France’s third-largest water company, SAUR, could trigger a debt refinancing that might endanger the sustainability of the company. SAUR counts fund managers AXA Private Equity (AXA PE) and Cube Infrastructure as shareholders.

Seche Environnement, the flagship company of French industrialist Joel Seche, has recently announced that it wants to exercise a call option that would allow it to increase its 33 percent stake in SAUR to 51 percent. 

The call option could see Seche buy an extra 18 percent shareholding from the Fonds Strategique d’Investissement (FSI), a fund affiliated to state-backed Caisse des Dépots et Consignations (CDC) and SAUR’s largest shareholder, with 38 percent of the utility. AXA PE (17 percent) and Cube Infrastructure (12 percent) hold the remainder of SAUR.

The problem is that any bid for majority control of the company would trigger a clause in SAUR’s debt covenants that could pave the way for banks to demand an immediate refinancing of the circa €2 billion in debt that SAUR holds in its books. Its existing debt is priced at comparatively cheap 2007-levels, meaning any refinancing could raise the cost of servicing the debt significantly. 

A refinancing under current market conditions could therefore potentially endanger the company’s sustainability. And that’s a risk SAUR’s board of directors is not eager to take, as has been made abundantly clear in a recent letter to FSI, leaked to the press.

“The financial risks that a change of control would create are likely to jeopardise our covenants in the short term, with extremely serious consequences for our cost of debt,” the utility’s directors argued. “It will be very hard – for the board of directors and for SAUR’s staff – to understand a decision by the public shareholder that would endanger the company,” the letter added.

SAUR’s €2 billion debt pile, which matures in 2014, is roughly equivalent to eight times its earnings before interest, tax, depreciation and amortisation (EBITDA). A source familiar with the negotiations said that “It’s true the company is saddled with a lot of cheap debt from 2007, but it has no cash flow problems whatsoever.” A refinancing at today's prices could change that, the source added.

Still, the source pointed out that, despite Seche’s decision to exercise the call option before it runs out in six months’ time, there are some hurdles to clear. For example, Seche still has to raise the requisite amount to buy the stake – about €180 million, according to reports in the French press – at a time when it is also refinancing its own debt, the source added. The deal would also need the requisite state approvals.

Private equity firm PAI Partners sold SAUR in 2007 to a consortium of CDC, Seche and AXA PE for €1.72 billion in equity. Cube joined the shareholding structure in late 2008, when AXA PE and CDP sold 3 percent and 9 percent respectively to Cube for an undisclosed amount. 

Seche’s call option expires on May 26, 2012.