Ontario Teachers Considers Bid for Northumbrian Water

MSTERDAM/LONDON (Reuters) – Shares in Northumbrian Water (NWG.L) jumped on Monday after a report that a Canadian pension fund could take it private, following a favourable review of water bills by British regulator Ofwat in November.

Northumbrian shares rose as much as 14 percent on Monday following a report Ontario Teachers Pension Plan (OTPP), its biggest shareholder, with a 27 percent stake, was planning a 1.7 billion pound ($2.77 billion) bid.

In a trading update on Monday, Northumbrian did not comment on a possible OTPP bid but said it expected group revenue for 2009/10 to be in line with the previous financial year. A spokeswoman for OTPP declined to comment.

Ofwat called in November for an overall cut in bills of just under 1 percent over the period to 2015, reassuring the water companies, which had feared bigger cuts.

With the five-year review complete, investors now have the visibility they need to assess Northumbrian’s potential.

Northumbrian, which provides 4.4 million customers with water in northeast and southeast England, has said it expects to maintain its current policy of increasing dividends by 3 percent a year before inflation.

In its trading update, Northumbrian also said its net debt is expected to be around 2.26 billion pounds as of March 31 and that the group was in a strong funding position with sufficient resources to meet its requirements for the next two years.

“A bid of 325 pence has a regulated asset value multiple in excess of 1.10 times,” Evo Securities analyst Lakis Athanasiou said in a note. “If confirmed, this will establish a higher trading range for the other water stocks.”

Shares in Northumbrian were trading at 289.5 pence at 1611 GMT, up 11.9 percent. Shares in the other two listed UK water companies, United Utilities (UU.L) and Severn Trent (SVT.L), were also up between 2.8 and 3.8 percent.


British water companies were the last of many state assets to be privatised during the 1980s, but now only the three remain listed.

This is because the regulatory framework and the monopolistic nature of the assets has appealed to infrastructure investors seeking long-term stable cashflows.

For example, Thames Water was bought by a group of infrastructure funds led by Australia’s Macquarie (MQG.AX) in December 2006, while in October 2007 another group of infrastructure funds led by JP Morgan took over Southern Water.

“This is a very attractive sector if you can get affordable debt, and clearly there will be people that are doing the math and discovering they can make better returns by taking them private,” said Stephen Tupper, a regulatory lawyer at Greenberg Traurig Maher.

However, jubilance among investors that the remaining water companies may also attract lucrative offers may be tempered by the impact their dividend policy has had on their credit status, which in turn affects financing costs.

Last week Standard & Poor’s cut the long-term credit rating of United Utilities from A- to BBB+ after assessing the company’s draft business plan for the regulatory period to 2015. ($1 = 0.6147 pound)

By Greg Roumeliotis and Myles Neligan
(Editing by Will Waterman)