Severn Trent Plc (SVT), the U.K.’s second-largest publicly traded water company, again rejected an increased takeover offer from a group including a Canadian infrastructure investor and Kuwait sovereign wealth fund.
The LongRiver Partners, comprising the Kuwait Investment Office, Borealis Infrastructure Management Inc. and Britain’s Universities Superannuation Scheme, offered 2,200 pence a share, or 5.3 billion pounds ($8.24 billion), according to a statement yesterday. The group’s third takeover approach since May 14 is 34 percent above Severn Trent’s average closing price for the six months to May 13, it said.
Severn Trent, named for two of Britain’s biggest rivers, is the latest U.K. utility to face potential foreign ownership after buyouts including Thames Water Utilities Ltd. and Yorkshire Water Services Ltd. British water utilities, regulated by Ofwat through price controls, offer steady gains that have lured buyers including Macquarie Group Ltd., KKR & Co. and Cheung Kong Infrastructure Holdings Ltd.
Severn Trent said in a statement late yesterday that the offer represents an increase of only 3.5 percent from the previous proposal, and a premium of only 20.5 percent to the company’s share price the day before LongRiver announced its interest.
“The board, having consulted its financial advisers, has unanimously concluded that the proposal continues to fail to reflect the significant long-term value of Severn Trent or to recognize its future potential,” according to the statement.
Severn Trent jumped as much as 8.9 percent to a record before paring gains to close 2.5 percent higher at 2,070 pence in London yesterday. The stock has advanced almost 32 percent this year. The yield on Severn Trent debt due in 2026 rose to the highest for the day at 3.59 percent.
“LongRiver’s proposal of 2,200 pence per share in cash represents certain and compelling value for Severn Trent shareholders,” Michael Rolland, chief executive officer at Borealis, said in its statement. “We look forward to engaging with the Severn Trent board to enable us to make our formal offer to Severn Trent shareholders. Without engagement, there can be no offer from the consortium,” he said.
The bidding group first made a takeover approach more than three weeks ago that Coventry-based Severn Trent rejected a day later. It returned with a higher offer on May 31 that it said valued Severn Trent at about 5.2 billion pounds.
The utility spurned the approach that it said valued the stock at 2,079.49 pence a share because stockholders wouldn’t receive a 45.51 pence dividend, leading the bidders to say they were “surprised and disappointed” at the rejection. The dividend is included in the latest offer at 2,200 pence, 3.5 percent higher than the May 31 approach.
“Severn management have been hanging tough,” Lakis Athanasiou, a utilities analyst at Agency Partners LLP in London, said by phone. “They’ve got no option now but to talk with the bidders. If they turn around and refuse the bid and the bidders walk, you can’t really see the management surviving not having accepted the bid because the share price will plummet over time.”
The pre-conditional cash offer values Severn Trent at about 5.3 billion pounds, according to LongRiver.
The approach represents a 41 percent premium to Severn Trent’s regulatory capital value of 7.4 billion pounds on March 31 using the “fair market” value of Severn Trent’s debt and 31 percent using the so-called book value, the group said.
The announcement of a firm intention to make an offer under U.K. takeover rules is subject to completion of due diligence and recommendation by the Severn Trent board, it said. LongRiver has until June 11 for a formal offer.
Borealis Infrastructure co-owns the U.K.’s largest ports operator, Associated British Ports. It’s the infrastructure unit of Ontario Municipal Employees Retirement System, or Omers. Based in Toronto, Omers 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 rainfall cut water use of commercial customers such as farmers, supplies drinking water to 7.7 million people and sewer services to 8.7 million clients.
Severn Trent isn’t the only U.K. water company to be the subject of recent takeover talk. The Daily Mail in April reported state-owned Abu Dhabi Investment Authority was considering a bid for Pennon while the Sunday Times said United Utilities hired Goldman Sachs Group Inc. amid speculation of a possible takeover deal.
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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