Veolia Sale Highlights Emerging Trend
BMI View: The announced sale of Veolia Environment's UK water business to Rift Acquisitions ( Morgan Stanley Infrastructure and Prudential ) reflects the strong non-traditional investor demand for UK water utilities. It follows a string of recent deals within the sector; most notably the takeover of Northumbrian Water , the relinquished controlling stake in Bristol Water and the continued M&A interest in privately held Thames Water . Yet again we highlight the sector's attractiveness due to its continuous, relatively predictable and long-term returns in light of market turmoil elsewhere - a sought after feature, especially for the increasingly dominant pension schemes.
Notching a milestone in its much debated EUR5bn restructuring plan to overhaul persistently low profit margins (net loss of EUR314mn in 2011) and mounting debt, French utility Veolia Environment has agreed to sell 90% of its UK water business to Rift Acquisitions, a joint venture between Prudential and Morgan Stanley Infrastructure.
Rating agencies Moody's and Fitch have been cutting Veolia's debt rating since the beginning of the year to Baa1 and BBB+ respectively, making it increasingly difficult for Veolia to borrow, as well as making it amongst the worst rated French utilities compared to EDF, GDF Suez and Suez Environment. Veolia's previous acquisition spree explains its long-term debt which currently stands at 2.36 times equity, compared to 1.61 for its direct rival Suez Environment, 1.37 for EDF and 0.69 times for GDF Suez.
Veolia, one of the world's largest waste-and-water utilities, is thus proceeding with the divestment as part of its significant cost-cutting programme. The restructuring is targeting a debt pile of around EUR15bn (US$18.8bn), a EUR90mn (US$111.7mn) accounting fraud, poor performance in southern Europe and North Arica (resulting in a forced write-down of EUR838mn in 2011), and a fragmented set of business activities and inconsistent expansion.
When the divestment was first announced earlier this year it immediately attracted a distinguished and wide set of players including, besides the winning bid, Goldman Sachs Infrastructure Partners, CVC Partners and Marubeni, reflecting the strong investor demand for UK water assets. In fact the EUR1.5bn (US$1.92bn) sale of Veolia UK is only the latest of a string of divestments within the UK water sector, having seen Northumbrian Water being sold to Cheung Kong Infrastructure last summer. Shortly afterwards Capstone, the Canadian Infrastructure fund, made its first investment in the UK, buying a controlling stake in Bristol Water. We have also seen a flurry of deals involving Kemble Water, the holding company for Thames Water, including inroads made by Abu Dhabi Investment Authority, BT Pension Fund, and China Investment Corporation. Hence, the Veolia deal is part of a trend, that we have highlighted for some time, of steady sell-offs within the UK's (and wider Europe's) utility sector amid wider continued financial turmoil.
Furthermore, the UK remains one of the most open markets for takeovers within the utilities sector, something that has attracted many institutional investors seeking stable, inflation-linked returns. In particular, contrary to the sometimes politically controversial sovereign wealth funds, we have observed increasing presence from pension plans that are attracted by the water sector because of its continuous, relatively predictable and long-term returns. This is especially the case now, in light of market turmoil elsewhere. In fact, over the last couple of months the biggest remaining listed UK water companies have largely outperformed the FTSE100 index. Markets reacted favourably to the divestment, and Veolia opened up 2.4% in Paris on news of the sale, outperforming a 0.2% rise in the wider utilities index.
|Sell Offs Gives Trade Offs|
|Veolia Environment Share Price Movements (EUR)|