Hong Kong tycoon Li Ka-shing has agreed to buy British utility Northumbrian Water Group for £2.4 billion ($3.9 billion) in the biggest takeover this year of a British-listed company.
Li has been expanding his business empire buying utility assets in developed countries, especially Britain where regulations allow for foreign ownership and price controls ensure a steady and predictable income stream from dividends.
Shares of Li’s Cheung Kong Infrastructure Holdings (CKI), which is leading the bid for Northumbrian Water, rose three per cent to a record closing high. The stock has gained about 30 per cent so far this year, driven by its acquisition strategy.
Analysts at UBS predicted that CKI and its 39-per cent-owned associate, Power Assets would seize other acquisition opportunities as cash-strapped investors and governments seek to cut their debt piles by selling infrastructure assets.
UBS upped its price target on CKI shares to HK$56 from HK$49 following the Northumbrian deal, repeating its “buy” rating.
Li, whose savvy deals earned him the nickname “superman” in local media, is a high-school drop out who built a plastic flower business into a global empire that includes ports-to-telecoms conglomerate Hutchison Whampoa Ltd.
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Analysts expect the deal to go ahead given Northumbrian’s board and its biggest shareholder, the Ontario Teachers’ Pension Plan, are backing it. CKI has sold its much smaller Cambridge Water investment to a division of HSBC to sidestep any regulatory hurdles.
“With the disposal of Cambridge Water, the main obstacle to the rapid conclusion of the bid has been removed,” Investec analyst Angelos Anastasiou said. “This ... should be reasonably positive for the rest of the (UK water companies).”
Shares in peers Severn Trent, Pennon Group and United Utilities rose as much as two per cent in London.
The Northumbrian deal would be CKI’s third investment in 18 months in the UK, boosting the value of its portfolio of gas, water and electricity assets there to HK$65 billion from HK$40 billion.
CKI has a 4.75 per cent stake in Southern Water and last year agreed to buy the British electricity distribution network of France’s EDF for £5.8 billion.
CKI is offering to buy Northumbrian for 465 pence per share. Northumbrian shares, which closed at 449.4 pence on Monday, were up four per cent at 468.6 pence at 1256 GMT. Northumbrian shareholders will also get a 9.57 pence a share final dividend, taking the total value of the bid to about 475 pence per share.
“It is a fair deal,” said Lorraine Tan, analyst at Standard & Poor’s Equity Research, Asia. “I think the bottom line impact to CKI holdings won’t be as much, as large as the UK power networks deal. I wouldn’t expect the same sort of uptick to its share price that we saw with that particular deal.”
Investec analyst Angelos Anastasiou said UK water companies, like electricity distribution networks recently sold by EDF and Germany’s E.ON, had regulated price controls in place until 2015, meaning they should attract broadly similar valuations.
“Today’s proposed bid level would be in-keeping with these bid premia,” he added.
CKI executives also noted that water tariff increases for the next 5 years have already been agreed with regulators.
RBC is lead financial adviser and HSBC is financial adviser to UK Water. Deutsche Bank is acting as exclusive financial adviser and corporate broker to Northumbrian Water.
CKI said it would contribute 879.5 million pounds to the Li-controlled consortium buying Northumbrian, funded with internal resources and a bridge loan of 600 million pounds.