UK investor Covalis, France’s Suez team up for Thames Water bid

LONDON (Reuters) -Britain’s Thames Water has received a joint bid from Covalis Capital and France’s Suez Group as it seeks more than 3 billion pounds ($3.8 billion) of new equity, in the latest part of a rescue aimed at preventing its collapse.

Britain’s biggest water supplier has close to 18 billion pounds ($23 billion) of debt and is fast running out of cash after its current owners refused to stump up new money in March, putting the government on standby for nationalisation.

The case has piled pressure on the government which has promised to respond to public anger about the state of the whole water sector, amid accusations from activists of mismanagement and prioritising profit over the environment – charges denied by the industry.

London-based asset manager Covalis has teamed up with Suez, a waste management utility which would provide expertise but not funding, to offer to buy an equity stake in Thames Water, in a deal first reported by the Financial Times.

Under its plan, Covalis would invest 1 billion pounds, then sell off some assets before floating the remains of the group, in a deal which would include giving Britain a golden share, a source close to the process said.

Other bidders participating in the process include Castle Water, a Scotland-headquartered supplier of water to businesses, and Hong Kong-based CK Infrastructure which owns Northumbrian Water, media reports say.

But Thames Water, which supplies water to 16 million people in and around London, faces a number of hurdles before the equity process can go ahead.

To avoid running out of cash, it needs creditors to finalise a 3 billion pound funding lifeline. It is also waiting for the regulator to rule on Dec. 19 on the prices it can charge for the next five years, a decision which will determine future profits.

TECHNICAL BID

Suez said in a statement it was well-placed to help address the challenges faced by Thames Water, whose ageing pipelines and treatment works have caused sewage pollution and which need substantial investment to cope with a rise in population and climate change.

“In exclusive partnership with Covalis, SUEZ is submitting a non-binding offer to advise and assist Thames Water by leveraging SUEZ’s expertise in technical advisory and organisational optimization,” the French group said.

The British government said in October it is “closely monitoring” Thames Water and will take action to put the company into a special administration regime if it does run out of money, but its preference is for a market-based solution.

The emergency loan needed to help Thames Water survive before any new equity investment can be secured has been offered by a group of class-A bondholders.

Covalis is a holder of some of Thames Water’s class-B bonds, according to two sources, but is not part of a group which offered a rival debt package to Thames.

Once it has secured the emergency loan, Thames Water would need to restructure its debt pile.

According to sources, Covalis’ offer will avoid “haircuts”, or valuation write downs, in the class-A bonds and offer a consensual restructuring solution to B bondholders.

The class B group of bondholders would be highly supportive of such a deal, according to one of the sources.

The class A debt rank senior to the B bondholders.

The current shareholders in Thames Water include Ontario Municipal Employees Retirement System, the UK’s Universities Superannuation Scheme, a unit of the Abu Dhabi Investment Authority and the China Investment Corporation.

They have said they will withdraw their ownership, according to the Financial Times. As Thames Water’s finances have unravelled, many of them have already written down their stakes to zero.

Thames Water and Covalis declined to comment.

($1 = 0.7833 pounds)

(Reporting by Sarah Young, Andres Gonzalez and Anousha Sakoui in London, Yamini Kalia in Bengaluru; Editing by Rashmi Aich, David Evans, Andrew Heavens and Christina Fincher)