Macquarie's attempt to buy Thames Water turns soggy

The chances of Macquarie snapping up Thames Water have been dealt a heavy blow by the Australian bank's failure to offload its existing water company.

First-round bids for Thames Water, which is valued at about £7bn, are due in on Wednesday. But Macquarie already owns a majority stake in South East Water, which is worth around £400m, and UK competition rules make it virtually impossible to own two water companies.

This means that Macquarie will have to submit a bid for Thames Water that is conditional on it finding a buyer for South East Water. Such a bid is less attractive to the owner of Thames Water, the German energy group RWE, which wants a quick sale.

Neither of the other two bidders - a consortium led by Guy Hands's private equity group Terra Firma, and a consortium of the UBS bank and a Qatar infrastructure fund - own water companies. This means that their bids will not be conditional on competition issues.

RWE said last November that it would sell Thames Water. One banker said that Macquarie had initially thought it would be able to keep hold of South East Water if it bought Thames Water. It believed it could avoid competition issues by placing the companies in two separate funds.

Another banker said the Australian bank had been "hawking" South East Water around the City looking for a buyer, but had yet to seal a deal. Macquarie declined to comment.

One way of engineering a quick sale is to "warehouse" South East Water with another bank or financial buyer. This buyer would acquire South East Water for a low price on the understanding that the water company would be sold back to Macquarie - at a slightly higher price - if the Australian bank's bid for Thames Water failed.

In theory, the bulging coffers of infrastructure and private equity funds mean that it should be possible for Macquarie to find a buyer. But bankers said Macquarie's failure to do so by now would count against it in the Thames Water auction.

Goldman Sachs and Deutsche Bank, which are handling the sale process for RWE, want to find a buyer by the end of September. A flotation rather than a straight sale of Thames Water is still possible, but is now less likely because of stock market volatility.