Severn Trent Plc (SVT), the second-largest publicly traded U.K. water utility, rejected a sweetened takeover proposal from a Canadian infrastructure investor and Kuwait’s sovereign wealth fund that valued the company at 5.2 billion pounds ($7.98 billion), saying the offer was too low.
The spurned approach, the second since May 14, values the utility at 2,079.49 pence a share because stockholders wouldn’t receive a 45.51 pence dividend, Coventry-based Severn Trent said today. LongRiver Partners, the bidding group, comprises the Kuwait Investment Office, Borealis Infrastructure Management Inc. and Britain’s Universities Superannuation Scheme.
“The board unanimously believes that LongRiver’s revised conditional proposal at 2,079.49 pence per share, excluding the final dividend which we have already announced, fails to value the attractions to Severn Trent’s shareholders of Severn Trent’s increasingly rare combination of yield, inflation-linked business model and potential,” Chairman Andrew Duff said in the statement.
Borealis and the bidding group made a second offer of 2,125 pence a share, including the dividend, on May 31 that values the share capital at about 5.2 billion pounds, it said today in a statement.
“LongRiver is surprised and disappointed at the reaction of the Severn Trent board,” Michael Rolland, chief executive officer at Borealis, said. “Our revised proposal is highly deliverable, appropriately financed and would offer certain and compelling value to Severn Trent’s shareholders, recognizing its higher cost of debt and long-term prospects.”
The Borealis-led group’s first approach was rejected within a day. Severn Trent fell 10 pence or 0.5 percent today to close at 2,042 pence in London trading. The shares have risen 30 percent this year.
The latest offer is a 16 percent premium to Severn Trent’s share price the day before the announcement of the bidder’s interest, Severn Trent said. Borealis said the offer represents a premium of 29 percent to the average closing price of a Severn Trent share for the six months prior to May 13.
The group under U.K. takeover rules has until June 11 to announce a formal intention to make a bid. Some analysts aren’t sure a higher bid may be coming.
“We struggle to see LongRiver Partners increasing its offer to much above 22 pounds/share, which is a 30.2 percent premium to RAV, using a market value of debt and assuming the final dividend is not paid,” Edmund Reid, a U.K. utilities analyst at JPMorgan Chase & Co., said in a note. The current proposal at 2,125 pence amounts to a 27.8 percent premium to the March 2014 regulated asset value using the book value of debt and assuming no final dividend payment, he said.
“One bid would be unusual,” Peter Atherton, an analyst at Liberum Capital Ltd. in London, said today by phone. “I would be surprised if this is their full and final offer.”
Severn Trent, named for two of Britain’s biggest rivers, is the latest U.K. utility to receive offers from abroad after takeovers at Yorkshire Water Services Ltd. and Thames Water Utilities Ltd. The utilities, with regulated prices, offer steady gains that lured buyers such as Macquarie Group Ltd., KKR & Co (KKR). and Cheung Kong Infrastructure Holdings Ltd.
Severn Trent said today its so-called regulatory capital value is seen expanding to just under 8 billion pounds by March 2015 and its policy is to boost dividends by the Retail Prices Index plus 3 percent by the same year.
“Our business benefits from long-term inflation-linked revenues, good prospects for further capital investment and a strong record of improving operational performance,” Duff said.
The Kuwaiti and British university groups made no public announcement today after Severn Trent’s rejection of the takeover approach.
The Borealis-led group was considering an increased offer to 2,000 pence to 2,100 pence a share from about 1,950 pence though no final decision had been made, said a person familiar with deliberations on May 30 who asked not to be identified because talks are private.
The rejection comes as Ofwat is consulting on prices water and sewer companies must deliver for the five years to 2020, with final charges to be published next year. A potential bid in the third year of the five-year regulatory cycle is “surprising,” Liberum’s Atherton said after Severn Trent rejected the initial approach.
Borealis Infrastructure co-owns the U.K.’s largest ports operator, Associated British Ports. It’s the infrastructure unit of the Ontario Municipal Employees Retirement System, or Omers. Based in Toronto, Omers (0629015D) is Canada’s sixth-biggest pension fund manager.
Severn Trent, which announced a 3.3 percent drop in underlying pretax profit to 266.3 million pounds on May 30 after high rains cut the water use of commercial customers such as farmers, supplies drinking water to 7.7 million people and sewer services to 8.7 million.
U.K. water companies have been the subject of takeover talk. The Daily Mail in April reported state-owned Abu Dhabi Investment Authority was considering a bid for Pennon Group Plc (PNN) and the Sunday Times said United Utilities Plc (UU/) hired Goldman Sachs Group Inc. amid speculation of a possible takeover.
Thames Water, with 14 million customers in the London area, was bought in 2006 by Kemble Water Holdings Ltd., with investors including Macquarie’s European Infrastructure Funds.
CKI, controlled by Hong Kong billionaire Li Ka-shing, completed an acquisition of Northumbrian Water Group Plc in 2011, while KKR bought South Staffordshire in May.
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