Portsmouth Water: a big deal?

Ancala got outbid by Severn Trent for Dee Valley Water, but it found itself in a field of one when chasing Portsmouth. Katey Pigden asks whether we can expect more WOCs to change hands.

Ancala Partners may have missed out on purchasing Dee Valley last year, but the infrastructure investment manager is set to secure its foothold in the UK’s water sector with its acquisition of Portsmouth Water.

The deal, which was announced on 20 February, is expected to complete later this month and will see Ancala acquire South Downs Capital, the parent company of the independent water only firm.

Portsmouth Water’s price tag has not been disclosed by Ancala, but Utility Week understands the deal could be worth between £150-£160 million.

Industry experts suggest the water company’s regulatory capital value for 2017-18 is about £130-£135 million and based on a premium of around 20 per cent indicate the figure could be close to the £160 million mark.

Bidding war

Last year, Ancala entered into a bidding war with Severn Trent for Dee Valley but its offer of £78.5 million fell short of Severn Trent’s £84 million in the final bidding instalment.

Now just over a year later, Ancala has cause for celebration and says it is looking forward to supporting Portsmouth Water in continuing to “deliver on its strategy to be the best water company in the UK”.

The purchase appears to have been a smooth process as this time round Ancala didn’t have to see off competition from a rival bidder.

Portsmouth Water has confirmed to Utility Week, the water company was effectively “not up for sale” and “did not receive any interest from other parties”.

Neville Smith, managing director at Portsmouth Water, says: “The current major shareholder was considering its options for the future and felt that the business needed an owner who could provide long-term capital, but at the same time allow the company to retain its independence and a long-term view.

“Ancala provides this and we believe shares the same values as Portsmouth Water. It is committed to delivering excellence for customers, employees and the environment.”

He adds: “The shareholder was satisfied that Ancala met its criteria for the sale.”

The multi-million-pound investment will allow Portsmouth to “pursue growth opportunities” which Ancala hints could include investments to “utilise the company’s privileged water resource position for the benefit of both Portsmouth Water customers and neighbouring areas through the provision of bulk supplies”.

Shared values

David Owens, industry partner at Ancala Partners and a former chief executive at Thames Water, will join the board of Portsmouth Water as a non-executive director following completion of the transaction.

He says: “Portsmouth Water has a committed and highly skilled workforce and management team. We look forward to working with them to build on Portsmouth Water’s leading position in the sector and further improve their proposition to customers. We fully support Portsmouth Water in its plans for future development of the business and we share the company’s values and commitment to outstanding customer service.”

Portsmouth Water’s chairman, Mike Kirk describes the deal as a “positive development”, which “preserves the company’s independence”.

Speaking at the time of the acquisition announcement Lee Mellor, a partner at Ancala, said: “Portsmouth Water is an excellent fit with our core investment strategy, which targets mid-market infrastructure businesses that deliver long-term, inflation-linked cashflows. At a time when regulators are placing great focus on performance and efficiency, we are delighted to be acquiring one of the leading companies in the UK water sector.”

Ancala launched its mid-market infrastructure platform in 2015 and has more than €950 million in funds under management.

Tim Power, a vice president at the company, who has more than 10 years of infrastructure and energy experience, tells Utility Week: “This is a great news story for Portsmouth Water given that Ancala will stand behind the company as an independent locally-based and industry-leading water company”.

He says: “At the company announcement at Portsmouth’s head office in Havant, staff were visibly relieved to know that their new owner is here for the long term and that not only would Ancala support the business as it stands so successfully today, but that we would be there to continue challenging staff to deliver the customer excellence the company is so well known for and to provide the capital for the business to grow its services where there is a customer need in the region.”

A few weeks prior to Ancala’s acquisition, these very pages explored whether a tough PR19 price review, planning for a record-low weighted average cost of capital (Wacc), could be the trigger for the water only companies (Wocs) being swallowed up.

Utilities analyst Nigel Hawkins says it is “unusual to take out a water company in mid-periodic review”, but he suggests Ofwat’s recent confirmation of a 2.4 per cent Wacc means “any bidder probably now knows the worst-case scenario”. But he suggests “other Wocs may feel vulnerable”.

A new direction

Meanwhile Richard Khaldi, water sector expert at PA Consulting Group, who previously worked as a senior director at regulator Ofwat, says this news has taken the sector in “another direction”.

He says: “Following Bournemouth’s acquisition by South West Water in 2016 commentators speculated how long the other Wocs could continue without being swallowed up by the larger water and sewerage companies (Wascs).

“The likelihood of further acquisitions was increased when the Competition and Markets Authority (CMA) decided that Ofwat’s concerns over the loss of comparators was not sufficient to prevent the Bournemouth purchase. Then Dee Valley’s acquisition by Severn Trent in early 2017 seemed to confirm the trend.

“However, Ancala’s purchase of Portsmouth Water has now taken the sector in another direction and bucked the trend, with the company’s chairman making it clear that Portsmouth Water would remain independent. Ancala will also clearly have taken into account the differing political intentions for the sector before deciding to invest so its decision can be seen as a vote of confidence by investors in the current regulatory regime.”

He adds: “These latest developments suggest that there is still life in the mergers and acquisition (M&A) market for Wocs, whether or not the purchasers are other water companies or outside investors.”

Ancala now has a foot in the door of the sector, but the company isn’t letting on if it is looking to acquire any other water companies in the UK.

But if any more “for sale” signs go up this year, Ancala may well decide to show its hand and firmly step inside.

Portsmouth Water

Portsmouth Water serves a domestic population of 722,000 in Portsmouth, parts of East Hampshire and West Sussex and has 251 employees. It also wholesales water supplies to a range of industrial and commercial customers.

The company was formed in 1857 as the Borough of Portsmouth Waterworks Company to supply Portsmouth. It grew through a series of mergers including with Gosport Waterworks Company in 1955. It is currently majority owned by its Employee Benefits Trust. The remainder of the shares are owned by several people, including current and former directors and their beneficiaries.

With PR19 having been billed as a challenging price review, many water companies expect to have their business plans slow-tracked or subject to significant scrutiny, as discovered by exclusive Utility Week research.

Portsmouth Water is among the companies tipped for just that, despite in many respects seeming well positioned for fast tracking with a market-leading service incentive mechanism (SIM) score of 87.7.

But our research, published earlier this year, suggests the company’s high levels of debt – funded by a single £99.6 million index-linked loan, due to mature in 2032, could see it struggle with a record-low Wacc.

In December last year, shortly after the publication of Ofwat’s final methodology for PR19, credit rating agency Moody’s corroborated this view, changing the company’s outlook from stable to negative.

What we know about Ancala Partners

In addition to the Portsmouth Water acquisition, Ancala says it has “extensive” infrastructure investment experience and is a “trusted partner and owner” for governments, regulators, customers and communities in which its portfolio businesses operate. Ancala’s other portfolio companies include:

• International Energy Group (IEG): IEG owns and operates the sole gas distribution network and supply business on the Channel Islands and Isle of Man.
• Scottish Area Gas Evacuation system (SAGE): Ancala acquired a 30.3 per cent interest in SAGE terminal and pipeline and a 60.6 per cent interest in Beryl pipeline from Apache Corporation in November 2017. The investment was made through the Ancala Midstream platform, a business established to complete and manage investments in North Sea midstream infrastructure assets.
• Leep Utilities: a multi-utility joint venture with the Peel Group, a leading UK property group, which owns and operates a range of regulated “last mile” electricity, water and district heating utility assets.
• Green Highland Renewables (GHR): a leading owner and operator of hydroelectric power plants in Scotland. Ancala has established GHR as a platform for growth in the UK hydro sector both organically and through acquisitions.
• Ancala Solar: Ancala has built a c.100MW portfolio of 21 ground mounted solar PV plants located across the UK. Ancala has recently retrofitted the portfolio with batteries for the storage of electricity.

• Biogen: a leading owner and operator of biogas plants in the UK with c.25MW installed capacity. Ancala is using the company as a platform for growth in the UK biogas sector and has recently completed the follow-on acquisitions of Millerhill and Tamar Energy.