Borealis Infrastructure Management Inc. and its Kuwaiti-British partners walked away from their 5.3 billion-pound ($8.3 billion) offer for the U.K. water utility Severn Trent Plc as the bid deadline expired.
The bidding group that included a Kuwait sovereign wealth fund declined to make an offer for Severn Trent under U.K. takeover rules at the 5 p.m. cut-off, LongRiver Partners said today. Britain’s Universities Superannuation Scheme was also part of the LongRiver group that first approached the U.K.’s second-largest publicly traded water company on May 14.
The Canadian-led group had announced June 10 “it would not put forward a further proposal for the company in the absence of meaningful engagement” with the utility, LongRiver said in a statement. No such engagement occurred so LongRiver decided against increasing its pre-conditional offer, it said.
Two attempts to sweeten the offer the past month had been rejected as too low by Coventry-based Severn Trent, named for two of Britain’s biggest rivers, which supplies drinking water to 7.7 million people and sewer services to 8.7 million in the Midlands and Wales. Seven of the U.K.’s 10 largest water companies are privately owned.
The utility “consistently made clear to the consortium our belief that Severn Trent has a value to our shareholders above the level it indicated it was willing to pay,” Chairman Andrew Duff said in a statement. “This difference in value has been at the heart of this process and the consortium has either not been able, or willing, to bridge that value gap.”
Severn Trent rejected the Canadian infrastructure investor-led group’s last bid of 2,200 pence a share on June 7 that it said was 34 percent above Severn Trent’s average closing price for six months to May 13. LongRiver first made a takeover approach May 14, which Severn Trent rebuffed a day later. It returned May 31 with an offer 3.5 percent higher.
The utility spurned the bid it said valued the stock at 2,079.49 pence a share because stockholders wouldn’t receive a 45.51 pence dividend. The dividend was included in the last offer of 2,200 pence. The stock closed today at 1,937 pence.
“I think 2,200p was an improved price. For the management not to have grabbed this with both hands I found astonishing,” Lakis Athanasiou, a utilities analyst at Agency Partners LLP in London, said by phone.
“If I were a bidder and willing to pay this sort of premium, I’d wait until summer 2014, just after the draft determination,” he said, referring to when the next price controls by industry regulator Ofwat will set for 2015 to 2020.
“The review is going to be severe with a big drop in allowed returns though still keeping in excess of the cost of capital,” Athanasiou said. He valued Severn Trent without the bid at 1,616 pence, a 14 percent premium to the asset base, in a note yesterday. Severn Trent fell 9 pence or 0.5 percent today in London, trimming gains this year to 23 percent.
Severn Trent was the latest U.K. utility to face potential foreign ownership after buyouts including Thames Water Utilities Ltd., Yorkshire Water Services Ltd. and Northumbrian Water Group Plc.
British water utilities, regulated by Ofwat through price controls, offer steady gains that won over buyers including KKR & Co., Macquarie Group Ltd. and Cheung Kong Infrastructure Holdings Ltd.
Borealis co-owns the U.K.’s largest ports operator, Associated British Ports. It’s the Toronto-based infrastructure unit of Ontario Municipal Employees Retirement System, or Omers. Omers is Canada’s sixth-biggest pension-fund manager.