Southern Water Commands Steep Price
In the first major infrastructure deal since the credit squeeze, the
Water companies, like other utilities are valued using the Regulatory Asset Base (“RAB”, also referred to as Regulatory Asset Value “RAV”), which looks at operating expense, depreciation and return on capital. The RAB is used to set rates and price caps for utilities.
The £4.2 billion price represents a premium of 43% to the most recent RAB - £2.914 billion, as determined in March, 2007. Last month, Mark Freshney at Credit Suisse projected that Southern Water might have an RAB of £3.1 billion by October, based upon their growth rate. Yet, according to CreditSights:
This is a crazy price to pay in our view, especially considering the proximity of the next water review (which will set prices for 2010-2015) and the fact that Southern Water is already a highly leveraged and covenanted structure.
What might this deal portend for other water companies? Credit Suisse’s Freshney sees Kelda as the most likely listed candidate for acquisition in the sector. Credit Sights adds Severn Trent and Pennon to the list, and also suggests that United Utilities could look to sell its water business in addition to the planned sale of its electricity business.
We though the price paid for Thames was too high, we thought the price paid for Anglian was too high and we think the price paid for SWS is too high. We also think the regulator is going to be tough at the next review.
The CreditSights report, Southern Water: Going, Going, Gone…for £4.2bn is available for purchase.
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