How Morgan Stanley made a splash

The battle for the acquisition of Veolia Environnement’s UK water assets always looked like a two-horse race.

One was Goldman Sachs, CVC Capital Partners and Universities Superannuation Scheme (USS); the other was Infracapital, together with AXA Private Equity (AXA PE) and South Korea’s National Pension Service (NPS). Japan’s Marubeni Corporation, bidding alone, always looked like a distant third.

What few expected, however, was that one of the two favourite consortia would undergo a radical change towards the final stages of bidding and still manage to win the auction. But that’s exactly what happened when AXA PE decided to pull out of the Infracapital consortium before final bids were due, taking co-investor NPS, a limited partner in AXA PE’s third infrastructure fund, with it.

Why did AXA PE quit? Theories abound, but the firm allegedly got cold feet on the return on Sterling it could earn from the deal, and felt it could source more attractive propositions in continental Europe.

For Infracapital, though, the last-minute ditching left it in an awkward position. The group had its heart set on acquiring a UK regulated water asset having participated in the sales process for a majority stake in Bristol Water, which ultimately went to Canada’s Capstone Infrastructure Corporation for $215 million. Now, after having fielded an initial bid for Veolia Water RegCo, the UK’s second-largest regulated water-only company, Infracapital was again looking at another lost auction.

But then Morgan Stanley entered the picture. It may have been brought in by Infracapital advisor Macquarie Capital, which had worked with Morgan Stanley on the acquisition of HSBC Rail and its failed bid for High Speed 1, the UK’s only high-speed rail line. As one industry source put it: “Morgan Stanley is probably one of the few teams in the industry that had the ability to come into a sales process that late in the game.”

Regardless, the partnership worked and the two fund managers ended up tabling the £1.24 billion (€1.55 billion; $1.92 billion) winning bid that saw them acquire 90 percent of Veolia’s UK water assets, at a 30 percent premium to the regulated asset base.


Veolia Environnement hired JP Morgan and Deutsche Bank at the beginning of the year to sell its UK water assets – a network serving some 3.5 million people across north-west London and the south-east of England – and sell them fast.

Under pressure to shed some €5 billion of debt before the end of 2013, Veolia’s UK water assets would serve as a “first significant divestment,” in the words of chief executive Antonie Frerot, allowing the company to cut its net debt by £1.16 billion.

As such, the auction attracted plenty of attention early on, including from a pairing of Deutsche Bank spin-out iCON Infrastructure and Canadian pension PSP Investissements.

iCON Infrastructure owns Sutton and East Surrey Water, whose assets would have allowed good synergies with Veolia’s. But the infrastructure fund and its co-investor were not interested in the price ratchet that comes with a competitive sales process and dropped out shortly after the initial bid stage.

That left the other teams that submitted final bids – Marubeni Corporation, one of the earliest bidders to express interest in the Veolia assets, and the Goldman Sachs/CVC Capital Partners/USS consortium.

According to industry sources, USS has been looking for a first investment in the regulated UK water sector for some time now, whereas CVC Capital Partners, which held a €200 million first close for its debut infrastructure fund earlier this year, is also on the lookout for a first deal.

However, it was the Infracapital/ Morgan Stanley team that proved hungrier. As one source put it: “At the end of the day, it’s price that separates the first and second place in an auction process – there’s very little else that separates them.”

And what was at one point shaping up as a battle between pension funds USS and NPS ended up with the squaring-off of two long-time investment bank rivals, with Morgan Stanley winning this round.