Teachers buys Chilean water companies

Southern Cross Group, a private equity firm focused on Latin America, has sold two Chilean water companies to the Ontario Teachers’ Pension Plan, a Canadian pension fund that has been stepping up its principal investment activity.

Teachers’ has bought outright Aguas Nuevo Sur Maule, which provides water supply and sanitation services to about 195,000 people in Chile, and taken a 50.1 percent stake in Empresa de Servicios Sanitarios del Bio-Bio, a larger water company with over 600,000 customers. It will now launch a tender offer for the remaining shares in ESSBIO.

Latin American specialist Southern Cross bought the two businesses from RWE Thames Water for $369 million just 14 months ago, in March 2006.

The two companies represent Teachers’ first infrastructure investments in South America. Senior vice-president Jim Leech said: “Chile is an excellent country for us to invest in because of its growing economy, openness to foreign investment, and mature regulatory environment for water and wastewater services.”

Leech said that Teachers’ would be a long-term investor, stressing that the current management of both companies would be left in place. “We believe these investments will provide stable, long-term returns to help us pay pensions to the teachers of Ontario for many years into the future,” he said.

The long-term, stable returns provided by infrastructure and utilities deals are considered to be particularly well-suited to pension funds with long term liabilities, and several have been stepping up their direct investment in a bid to boost returns.

This is not the OTPP’s first investment in a water company. It also holds a 25 per cent interest in Northumbrian Water Group, a UK-listed water and wastewater services company with 4.3 million customers, which it bought in 2005.

The Ontario Teachers’ Pension Plan is one of Canada’s largest pension funds, with about C$106 billion ($96 billion) under management – about C$16 billion of which is in alternative assets. A long-time investor in private equity, it has more recently been stepping up its principal investment activity. In February it teamed up with Ares Management to buy vitamin retailer GNC for $1.65 billion, while more recently it has linked with a mega-bid for BCE, a Canadian telecoms group valued at about $45 billion. Teachers’ Private Capital, its buyout arm, recently opened an office in London as a base for its future European direct investment activity.

Dresdner Kleinwort advised Teachers’ on the deal. The bank has been an adviser to Teachers since 2005 when the pension fund bought two UK gas networks from National Grid Transco.