Former Pennon CFO joins Thames as KKR is announced as preferred bidder

The board of Thames Water has selected US private equity group KKR as the preferred bidder to take a majority stake in the company.

With emergency debt funding agreed and cleared by the courts, it was not a complete surprise to see the departure of chief financial officer (CFO) Alastair Cochran shortly before the last day of the company’s financial year. Steve Buck takes up post as his successor today. Buck served a short term as Pennon Group’s CFO before stepping down in July 2024 on the grounds of personal reasons. He was previously Anglian Water Group CFO and has earlier experience in the energy sector.

KKR’s proposal includes a “material impairment” to the utility’s Class A debt. The board’s selection of KKR as its preferred partner to enter the phase-two diligence stage of its equity-raising process does not guarantee that a binding proposal will be made, and Thames has noted that other senior creditors continue to progress alternative transaction structures to recapitalise the business.

It is understood that the KKR proposal does not envisage a break-up of the utility or other significant asset sales, and Thames observed that “agreed transaction terms are targeted for the second quarter of 2025 with a view to completing a recapitalisation in the second half of 2025.” Although Thames has not stated the reasons for choosing KKR, it could be that it is proposing smaller debt haircuts for the Class A debtors than rival bidders. Offering a £4bn equity injection, which might include debt to equity swaps, could secure Thames’ financial future.

Continuing in the background are Thames’ discussions with Ofwat about mitigating the uncertainty of fines and penalties for PR24. These remain an unquantifiable risk to the returns of any potential equity investor. A successful plea for special treatment by Ofwat may be as vital to the success of the bid as the level of debt haircut agreed by Thames’ creditors. 

Who is KKR?

KKR is a New York-based private equity and real estate investment firm. It has history as an asset-owner in the regulated UK water market. Its track record may have been an important factor in the Thames board deciding to appoint it as preferred bidder. It owned South Staffordshire Water between 2013 and 2018, and currently owns 25% of Northumbrian Water, which it acquired in 2022 for £870m.

KKR’s global infrastructure investment proposition, in line with its private equity peers, is to buy an asset at a deeply discounted price and create substantial value through financial restructuring and operational improvement. Given the premia paid for regulated water assets over the last 25 years, restructuring a deeply discounted regulated asset, KKR hopes, might generate significant shareholder value. 

Competition implications for KKR  

As KKR could potentially end up with partial ownership of more than one water company, there would undoubtedly be scrutiny of any deal by the Competition and Markets Authority (CMA). It is likely that KKR will have contacted Ofwat and the CMA in advance to discuss the possible ramifications of the proposed Thames transaction. An added regulatory complexity is that Northumbrian Water recently referred its final price determination for the next five-year asset management period to the CMA.

Ofwat has been consulting on its approach to mergers, and is revisiting the special merger regime it established in 2015. This protocol was set up in order to maintain a sufficient number of comparators to allow it to regulate water monopolies effectively. Any mergers are automatically referred to the CMA, and if KKR is successful in acquiring a controlling interest in Thames, the CMA may require it to divest its stake in Northumbrian.

“We are proposing to update our guidance to reflect the fact that our price review methodology and the regulatory landscape have evolved since [2015], and may further evolve in the future, and to incorporate the learning from previous merger assessments,” the regulator observed. The KKR/Thames situation may yet prove to be the catalyst for Ofwat to work through its proposed changes to the merger regime.