KKR’s dealmakers aren’t any strangers to making an attempt to become profitable from messy conditions.
Even so, a visit to Thames Water’s sprawling Beckton Sewage Therapy works is just not probably the most inviting task. Initially constructed as a part of the Victorian sewage system overseen by Sir Joseph Bazalgette, Beckton is now the largest waste therapy works in Europe, serving greater than 4mn Londoners. It has required intensive upgrades to attempt to curtail human waste flowing into the river Thames throughout torrential rain.
Executives from the US non-public fairness agency just lately took within the sights and smells of Beckton throughout a whistle-stop tour of Thames Water’s main services, as a part of the intensive due diligence KKR is enterprise to attempt to take over the near-insolvent utility and rescue it from the brink of nationalisation because it struggles below practically £20bn of debt.
KKR’s £4bn proposal made it Thames Water’s most well-liked bidder to take management of the water firm that serves 16mn individuals throughout London and the Thames Valley. The US agency, which has $638bn in belongings, is in the course of a 10-week exclusivity interval in an equity-raising course of for the water firm, whose present shareholders basically walked away final yr. Thames Water is looking for to agree a deal by June.
KKR faces the problem not solely of wringing revenue out of Thames Water’s creaking infrastructure but additionally securing the blessing of regulators and warring factions of hedge funds that maintain the utility’s bonds. If this weren’t onerous sufficient, KKR should do that in an setting the place Thames Water has change into a lightning rod for widespread public anger on the state of the nation’s waterways.
Even KKR’s due diligence efforts might stoke controversy, on condition that Thames Water is overlaying a part of the invoice for the roughly 100 individuals the agency has evaluating a deal, in response to individuals acquainted with the matter.
Whereas it’s not uncommon for corporations to cowl some prices for potential acquirers — which for KKR embrace using advisers at funding financial institution PJT Companions, regulation agency Kirkland & Ellis and administration advisor Roland Berger — Thames Water’s £15mn month-to-month invoice on restructuring advisers has already provoked outcry.
Some campaigners have additionally highlighted KKR’s buccaneering previous, with the early pioneer of leveraged buyouts infamously dubbed the “Barbarians on the Gate” within the late Eighties for its raid on US conglomerate RJR Nabisco.
Charlie Maynard, a Liberal Democrat MP who spearheaded a public-interest courtroom problem to Thames Water taking over extra high-interest debt, mentioned that permitting the utility to stay closely indebted below new non-public fairness possession was “like watching a rerun of a horror film”.
“That is what acquired Thames Water into bother within the first place,” he added.
Thames Water responded that the bid was a “holistic and elementary recapitalisation”.
Individuals near KKR have emphasised that its infrastructure division targets decrease annual returns — about 10 per cent to fifteen per cent — than its higher-octane non-public fairness funds, whereas holding on to belongings for longer durations of time than conventional funds could be snug with.
This $86bn infrastructure division is of rising significance to KKR, as macroeconomic turbulence has curtailed dealmaking, making it more durable to return money to traders in its non-public fairness funds.
Infrastructure is a key a part of KKR’s current push into elevating cash from rich people, who’re lured by the prospect of proudly owning uncorrelated, cash-generative belongings. One of many agency’s Luxembourg infrastructure funds focusing on particular person traders has recorded an annualised return of about 13.5 per cent since its June 2023 launch, current filings present.
Not all of its current infrastructure investments have lived as much as the plain-sailing pitch, nevertheless.
The Luxembourg fund’s second-biggest asset is FiberCop, the fixed-line telecommunications community carved out from Telecom Italia final yr in a marquee €22bn deal.
KKR has clashed with FiberCop’s administration over a projected €449mn earnings gap, the Monetary Instances has beforehand reported, sparking the US agency to take better management over the politically delicate enterprise.
FiberCop, which like Thames Water traces its roots to a state-owned enterprise, has beforehand mentioned the 2025 finances was according to the unique shareholders’ settlement and denied that there was rigidity amongst its homeowners.
One of many architects of the FiberCop deal, KKR companion James Gordon, can be spearheading the Thames Water buyout.
As with a number of of his senior KKR infrastructure colleagues, Gordon spent a lot of his early profession at Australia’s Macquarie, Thames Water’s former proprietor that has confronted criticism for saddling the utility with extra debt earlier than cashing out in a 2017 sale.
None of KKR’s outstanding Macquarie alumni have been concerned within the prior Thames Water buyout, in response to individuals acquainted with the state of affairs.
Nonetheless, the troublesome legacy of the Australian group’s possession is only one cause why any bid for the utility faces heightened scrutiny.
Ofwat, the sector regulator, was annoyed at Thames Water’s choice to grant KKR a interval of exclusivity that has frozen out different bidders, in response to individuals acquainted with the matter. Whereas the watchdog has no say in how Thames Water manages its fairness increase and officers consider KKR is a reputable potential proprietor, they’d have most well-liked continued competitors amongst bidders, the individuals added. Ofwat declined to remark.
Thames Water mentioned in an announcement that “there isn’t a certainty {that a} binding fairness proposal will probably be forthcoming because it stays topic to diligence, documentation and regulatory and different approvals.
“Because of this, sure senior collectors proceed to progress in parallel different transaction buildings to hunt to recapitalise the enterprise. Given this, inherent competitors stays in the course of the course of.”
KKR’s most severe competitors was CK Infrastructure, a part of Hong Kong’s wider CK Hutchison group that has deep roots in Britain. CKI and KKR are already co-owners of Northumbrian Water, holding majority and minority stakes, respectively.
Individuals near the talks be aware that KKR took a extra conciliatory strategy in the direction of Thames Water’s influential top-ranking collectors. CKI’s bid, in distinction, was conditional on bondholders in Thames Water’s near-£20bn debt stack taking deeper haircuts.
Whereas the exact contours of the restructuring that will accompany KKR’s deliberate £4bn fairness injection are but to be hashed out, Thames Water’s senior bonds might face writedowns of 25 per cent or extra, in response to these near the discussions.
KKR’s preliminary bid included a element providing these bondholders the chance to spend money on Thames Water’s fairness and take as excessive as a 50 per cent stake, in response to an individual near the talks. This might enable US hedge funds similar to Elliott Administration and Silver Level Capital that maintain the debt to change into shareholders alongside KKR.
Given the disparate holders of those bonds, which additionally embrace massive insurers and asset managers, a number of collectors anticipate to be provided a “Chinese language menu” that permits them to tackle totally different proportions of latest debt and fairness primarily based on their danger tolerance.
KKR is planning on wiping out Thames Water’s £1bn of lower-ranking class B bondholders, though it might want to show to London’s courts that writedowns have been utilized pretty. The courts solely accredited final month a £3bn emergency mortgage from senior bondholders after a protracted authorized problem from junior collectors.
If KKR fails to appease bondholders, collectors might current their very own rival bid for the utility. Failing that, Thames Water might nonetheless face non permanent nationalisation by way of the federal government’s particular administration regime.
Even with a deal, the onerous a part of working a beleaguered utility that serves practically 1 / 4 of the UK inhabitants begins.
KKR executives have emphasised {that a} full turnaround might take wherever between seven to 12 years, solely after which might they doubtlessly money out by way of a list.
The utility has paused its problem to Ofwat over its most up-to-date dedication on the quantity by which Thames Water can increase buyer payments. Nevertheless, KKR needs to steer the regulator to reduce legacy fines, in response to individuals near the agency.
KKR has proved keen to tackle regulators elsewhere. In September, the agency and different traders in a Finnish electrical energy community took authorized motion in opposition to the Nordic nation,after the Finnish Vitality Authority tried to curb rising energy transmission costs. The dispute is ongoing.
But the dimensions of the problem at Thames Water stays formidable even for probably the most hard-nosed investor.
“There are many simpler offers KKR might do and nonetheless meet its [minimum expected return],” mentioned an adviser to a few of Thames Water’s collectors. “Equally massive and extra skilled infra funds have failed after seven years of making an attempt [to turn Thames around].”