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Consortium Pays $2.7 Billion for Southern Water

A group of infrastructure funds led by JPMorgan Chase agreed to buy U.K. water company Southern Water from Royal Bank of Scotland for about 1.3 billion pounds (US$2.7 billion) excluding debt.

JPMorgan -- which beat a rival group led by Goldman Sachs, according to sources -- partnered with Australia's Challenger Infrastructure Fund and other funds to buy the company, which provides water to more than 2 million people in southern England.

Including about 2.8 billion pounds in debt, the deal valued Southern Water at 4.195 billion pounds, the bidders said on Tuesday.

Water companies and other utilities are attractive to investors such as pension funds because of their stable, secure cashflows.

Sydney-based Challenger was advised by Australia's Macquarie Bank which last year bought Britain's Thames Water for 8 billion pounds.

"Southern Water has significant real per annum growth rate, double the industry average ... and that's what made it so attractive to us," Challenger Chief Executive Steve Bickerton told Reuters. "There are significant operating efficiency gains to be had out of this company," he said, refusing to rule out job cuts.

JPMorgan will pay 360 million pounds for a 32% stake in Southern Water and Challenger 300 million pounds for 27%.

The other investors are a group of seven Australasian pension funds advised by Access Capital, which will have an 18% stake, UBS with 18%, Hermes 4% and Consensus Business Group with 1%.

The finance package also includes the potential to syndicate 156 million pounds of equity in the next 12 months, Challenger said.

Royal Bank of Scotland, which bought a controlling stake in Southern Water in 2003, put the firm up for sale earlier this year. RBS is leading a consortium which is currently buying Dutch bank ABN AMRO for more than $100 billion.

Strong Interest

Southern Water provides water and wastewater treatment in southern England counties including Kent, Sussex, Hampshire and the Isle of Wight.

Bickerton said the deal valued Southern Water at 9.2 times current year earnings before interest, tax, depreciation and amortization (EBITDA).

Sources told Reuters last month one of the rival bidders included the infrastructure arm of U.S. investment bank Goldman Sachs, as well as Deutsche Bank investment fund RREEF, Australian infrastructure investor Babcock and Brown, the U.S.'s General Electric and British insurer
Prudential's M&G unit.

Utilities are viewed as relatively safe assets in an economic downturn so are more isolated than most from the global credit crunch, initially sparked by concerns over U.S. subprime mortgages.

Bickerton said the global credit squeeze had not impacted fund-raising for the deal. "At that quality end of the market there is still a huge amount of appetite," he told Reuters.

Challenger said it would fund its investment through a A$494 million (US$441.9 million) drawdown against its acquisition debt facility and the issue of 97.9 million pounds in redeemable preference securities.