New York private equity giant KKR today dramatically pulled out of a financial rescue plan for heavily indebted Thames Water.
The latest blow for Britain’s biggest water supplier came when it revealed that KKR “has indicated that it will not be in a position to proceed” with its proposal.
The withdrawal of KKR makes it more likely that Thames Water will end up in a form of nationalisation creating yet another headache for the Chancellor Rachel Reeves.
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KKR did not comment directly but it is understood the firm was unnerved by the level of political uncertainty around the water sector which has come under heavy criticism over recent months.
Thames Water, which is saddled with nearly £20 billion in debt announced in later March that it selected the renowned US firm once regarded as a feared Wall Street corporate raider as its preferred partner as it fought to stave off nationalisation.
KKR was expected to acquire a stake in Thames worth £4 billion as part of the package and would seek to raise further equity funding to recapitalise the utilities straining balance sheet.
But today Thames said: “Following completion of this diligence stage, KKR and the senior creditors have prepared detailed plans, including turnaround plans which have been shared with the company.
“However, KKR has indicated that it will not be in a position to proceed, and its preferred partner status has now lapsed. The company accordingly intends to progress discussions on the senior creditors' plan with Ofwat and other stakeholders.
Thames Water chairman Sir Adrian Montague said: "Whilst today's news is disappointing, we continue to believe that a sustainable recapitalisation of the company is in the best interests of all stakeholders and continue to work with our creditors and stakeholders to achieve that goal.
“The company will therefore progress discussions on the senior creditors' plan with Ofwat and other stakeholders. The board would like to thank the senior creditors for their continuing support."
Clean rivers campaigner Fergal Sharkey said in a post on the social media platform X: “ I see the water industry is out there pushing the line that KKR pulled out of the Thames Water deal because of regulation. Suspect this has more to do with it. KKR wanted creditors to take a 40% hit on the debt, they told KKR where to get off. “
The latest setback came as the Independent Water Commission headed by former senior civil servant and deputy governor of the Bank of England Sir John Cunliffe recommended a radical shake-up of water regulation
Its interim findings on water regulation set out five areas where “he believes wide-ranging and fundamental change is needed to reset the water sector in England and Wales.”
Only last week Thames Water was hit with record fines from Ofwat totalling nearly £123 million for breaches of rules relating to its wastewater operations and for breaking rules on dividend payments.
Thames, which serves 16 million customers in London and south-east England, needs to secure fresh funding for its operations by the end of June.
If Thames Water fails to secure new financing it could be placed into a special administration regime by the UK government, effectively a temporary nationalisation.
Thames Water increased customer bills by an average of 31% in April.
Sir Jon Cunliffe has recommended that Ofwat should be “radically streamlined” to fix Britain’s troubled water sector.
Cunliffe said regulators such as Ofwat, the Environment Agency and the Drinking Water Inspectorate needed to be stronger and smarter.
In an article in The Times he wrote: “Much friction, incoherence and cost in the system comes from the way the regulators with very different remits interact. Radical streamlining and alignment of regulators is now essential.”
Cat Hobbs, Founder and Director of campaign group We Own It, said: “KKR is a private equity firm that inspired a book and film about corporate greed called Barbarians at the Gate. It's a good thing they’re not getting their claws into one of our biggest utilities serving 16 million customers.
“If another private company takes a stake in Thames Water, this will do nothing to change the picture. They will still be drowning in over £19 billion of debt, still trying to dodge environmental fines, and will still prioritise shareholders over billpayers and the environment.
“With record levels of sewage pollution and water bills going up by 35%, what we are witnessing is the catastrophic failure of Thatcher’s privatisation experiment.
“The Cunliffe water report, published today, is an exercise in tinkering around the edges while trying to look like you’re ushering in radical reform - but the public isn’t buying it. 82% of us want water in public hands.
“The government has ducked the issue for too long – special administration to slash the rotten debt, then full public ownership, is the only way to reverse this catastrophe.”
Russ Mould, investment director at broker AJ Bell said: “Mere days after the UK government closed the final chapter on its banking sector bailout by selling its remaining stake in NatWest, it’s now the turn of the utility sector to be rescued.
“It looks increasingly like Thames Water will have to be renationalised, after US private equity firm KKR pulled out of plans to inject £4 billion into the business.
“KKR’s U-turn is a surprise, given its investment seemed like a done deal. The government indicated all through the fundraising process that it was ready to step in and take over Thames Water if necessary. If this does happen, it would represent a soggy end to what’s been a failed privatisation.”
