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Senior utilities analysts at Barclays have accused the Labour party of giving an unrealistic valuation of water companies and how much it would cost to renationalise the industry.
In a circular seen by Utility Week the investment bank’s utilities research team references the “lowball number on valuation” which has come to light following a leaked Labour document.
Labour’s leader Jeremy Corbyn plans to renationalise the water industry at a fraction of the sector’s market value and would limit the level of compensation to “less than £20 billion”, according to an article in The Sunday Times.
Head of European utilities research at Barclays, Dominic Nash, along with analysts Peter Crampton and Catherine Hubert-Dorel estimate the £20 billion figure would be for “equity”.
“Ofwat published a regulated asset base (RCV) for the industry of c.£75-80 billion by March 2019.
“With an average leverage of the industry of c.65 per cent the equity in the regulatory invested capital (RCV) is around £30 billion, and debt will be in the order of £45-50 billion. This would imply a 10-15 per cent discount to RCV,” the document states.
Pensioners, employees and shareholders could lose half their value in the water companies if Labour gets to power and implements its leaked plans.
Peter Simpson, the chief executive of Anglian Water hit back at the proposals and said the water sector is already tackling issues highlighted by Labour as part of its reason to target water companies.
The blueprint, reported by the newspaper at the weekend, could see Labour pay up to £24 billion less than the conservative value of water companies which is estimated at £44 billion. With debt included the water industry could be valued up to £90 billion, according to a report published by the Social Market Foundation (SMF) last year.
Labour described the £90 billion detailed by the SMF as a “fantasy figure”.
And analysis by rating agency Moody’s last month for the Financial Times estimated the book value of the water companies in England at just £14.5 billion.
The Barclays document adds: “We believe that the RCV [regulatory capital value] is the true measure for shareholder invested capital.”
It suggests that accounting book value does not consider the nature of real allowed returns or the precedence of using RCV as the metric for calculating returns in the Windfall Tax 1997.
“We believe that final compensation will be at RCV.”
The circular also outlines that shareholders will have three main areas of challenging compensation.
These include using UK courts to adjudicate a value along the lines of Northern Rock or Railtrack; the International Bill of Human Rights which enshrines the rights of individuals to enjoy property and finally bilateral investment treaties which allow international courts to set values for compensation.
The analysts said that in their view all three of the listed water companies – Severn Trent, Pennon Group and United Utilities are “high quality” but they stressed that “political risk remains”.
“We estimate the sector is currently trading at a 7 per cent premium to March 2020 RAB [regulatory asset base], which results in a fundamental 15-20 per cent share price upside potential. However, once political risk is factored in, we remain equal weight on Severn Trent, Pennon Group and United Utilities.
“Severn Trent is our preferred water company on valuation.”
A Labour party spokesperson said: “Water bills have risen 40 per cent in real terms since privatisation. In the last ten years, water companies have paid 1,000 times more in dividends to their shareholders than in tax. Some have even paid more in dividends than they have made in profit, running up debts that are passed on to bill payers.
“Labour will fix this broken system by bringing the water companies back into public ownership, saving households £100 per year on their bills.”
The Labour briefing paper states compensation would be a “political process of negotiation with shareholders”. It will consider state subsidies, pension fund deficits and “asset stripping since privatisation”.
It indicated that the final level of compensation may well be less than £20 billion. Shareholders and lenders would receive government bonds in return.
The level of compensation paid to water companies would be decided by parliament.
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