A Chinese sovereign wealth fund is poised to buy a stake in the water network that serves London, in what would be the fund’s first acquisition in the UK following investment talks with British politicians.
The deal follows a visit to China this week by chancellor George Osborne, who has been urging Chinese investors to inject money into British infrastructure projects. Beijing has been seeking more lucrative returns than those available from low-yielding government bonds.
The acquisition of up to 10 percent of the holding company that owns Thames Water is close to being agreed by China Investment Corporation, the country’s $410 billon sovereign wealth fund, according to one person familiar with the situation. The Chinese investment was confirmed by a senior government official.
In December Abu Dhabi Investment Authority, one of the world’s largest sovereign wealth funds, acquired about 9.9 percent of Thames Water from a consortium of investors led by Australian investment bank Macquarie. The bank declined at the time to reveal terms of the sale of the stake in Kemble Water, which is the holding company for the UK utility.
Mr Osborne this week held “very serious meetings of substance” during a short visit to Beijing, including with Lou Jiwei, chairman of CIC, as well as the Industrial and Commercial Bank of China, the world’s biggest bank by market capitalisation.
Mr Lou wrote in the Financial Times last November that he saw a “win-win” situation where Chinese funds would help to update the west’s infrastructure — starting with Britain — on the grounds that such schemes offered solid returns.
He praised Britain as “one of the most open economies in the world” with a “sound legal system”. In his article, Mr Lou suggested Chinese companies and investors wanted to own and operate infrastructure in the west as well as help build it.
Thames Water, which provides sewerage services to 14 millon customers and water to 8.8 millon in London and the Thames Valley, was sold for an enterprise value of £8 billon by German utility group RWE in 2006, which included £4.8 billon in cash and £3.2 billon in debt.
The water holding company is owned by a consortium of investors, the largest of which are funds managed by Macquarie. The Australian bank also manages the utility on behalf of other shareholders. The Macquarie-led consortium, which beat three other serious bidders in the 2006 auction including one led by the Qatar Investment Authority, said it remained committed to managing Thames Water as its majority owner.
It is the largest of the 10 water and sewerage companies in England and Wales by both regulatory capital value and number of customers served.
The latest investment in Thames Water comes halfway through the second year of a five-year funding settlement for water companies in England and Wales with the industry watchdog Ofwat. It also follows the publication of a government white paper, which has been generally interpreted as seeking to protect the attraction of the industry as a safe haven for equity and debt investors.