Yorkshire Water Undervalued by Goldman’s Reported Bid, RBC Says

Yorkshire Water Services Ltd., a supplier to more than 1.9 million households in northern England, is undervalued by a 2 billion-pound ($3 billion) bid reported in the Sunday Times, RBC Capital Markets LLC said.

The offer from Goldman Sachs Group Inc. and Allianz SE for a 30 percent stake would represent only a 13 percent premium on the utility’s regulatory capital value, John Musk, an analyst at RBC in London, said today in a note. That “would appear to be low for an M&A transaction.”

Goldman Sachs plans to make a joint bid with German insurer Allianz, the London-based Times reported yesterday, without saying where it got the information. Citigroup Inc. will sell a 17 percent stake and M&G Investments will divest its 13 percent holding, the newspaper said.

Goldman Sachs and Allianz declined to comment when Bloomberg News called.

“In the absence of any concrete details of the bid package, the implied premium to Yorkshire Water’s regulated asset value looks at first glance to be slightly on the thin side,” said Ian Elkins, editor of Oxford, England-based publication Global Water Intelligence.

While investors are attracted to the steady revenues that water assets bring, U.K. utilities are undergoing a regulatory shift. Industry watchdog Ofwat last month published changes to the way they can charge customers from 2015 to 2020. These include separate price controls for wholesale and retail arms to spur competition in the retail market by allowing non-household customers to choose suppliers.

Lower Offer

Pressure on the selling shareholders to offload their stakes before the price review may prompt the prospective buyers to offer a lower valuation multiple, Elkins said by e-mail. “We expect this deal to be the last sizeable deal in the regulated water utilities space in the U.K. until after the results of the next price review are known,” he said.

Utilities have until Dec. 2 to submit their business plans and Ofwat will make final decisions on prices in 2015.

Other U.K. water companies have been subject to takeover talk. The Daily Mail in April said state-owned Abu Dhabi Investment Authority was considering a bid for Pennon Group Plc, while the Times said United Utilities Group Plc hired Goldman Sachs amid speculation of a possible takeover. Severn Trent Plc rejected a takeover offer in June, saying it was too low.

“The few expected changes to the regulatory regime over the next few years do not seem to detract from the attractiveness of stable, long-term returns that water investments offer investors,” Andrew Cox, KPMG LLP’s global head of energy and natural resources for transactions and restructuring, said today by e-mail. “There are a limited number of such investment opportunities available.”

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