Terra Firma and Qatar state fund to lead Thames race

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The Independent Online

Guy Hands' Terra Firma private equity business and Qatar's state investment fund are to lead the £7bn bidding contest for Thames Water, with offers due to be lodged today.

It is likely that a consortium of 3i and the Canadian pension fund Borealis will also make an offer, while it is possible that the Australian infrastructure investor Alinta will join the auction. There is speculation that another Australian investor, the aggressively acquisitive Macquarie, will also be involved.

Despite a deluge of negative publicity, Thames Water's owner, the German utility RWE, is to press ahead with divesting the underperforming business. The German company is pursuing a twin-track strategy to either sell Thames - if the offers are good enough - or float the business on the stock market. The process is being run by the investment banks Goldman Sachs and Deutsche Bank.

Although initially RWE signalled that a float was more likely, stock market volatility and negative publicity surrounding Thames have made a straight sale the most probable outcome.

Terra Firma is understood to have put together a finance package consisting of about £5bn of debt and £2bn worth of equity. It is being advised by Merrill Lynch, Morgan Stanley, Citigroup and Lehman Brothers, and it is those banks that will lead the financing. The bid has recruited John Roberts, the former chief executive of United Utilities, to run Thames, should it win.

Qatar's state-owned investment fund is in alliance with the banking giant UBS. The bidder would retain the existing management of Thames, despite the fact that it has presided over a series of failures to meet targets set by the water regulator, Ofwat.

Neither Qatar nor Terra Firma will face competition hurdles as they do not own water companies in this country. However, any bid by Macquarie is complicated by its ownership of South East Water.

Reports have said that Macquarie has been trying unsuccessfully to offload South East Water. 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 RWE, which wants a quick sale.

Last week, RWE's chief executive, Harry Roels, announcing the group's financial results, said: "At Thames Water, we are continuing to keep both divestment options open: an IPO and a possible sale to long-term investors. Yes, we are conducting various talks. And no, I can not reveal the names of any potential buyers."

He added: "The fact that we have agreed new quality goals and additional investment obligations with the British regulator will have no influence on the timeline. Here, too, we have made personnel changes with a view to the divestment by appointing a new chairman to the board of directors and a new chief financial officer."