Thames Water edges closer to £7bn sale

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The German power giant RWE will this week open the books on Thames Water to bidders in the utility's £7bn auction.

The move will pave the way for first-round offers and is the first major step forward after RWE said last year that it planned to unload the business through either a stock market flotation or a sale.

Industry sources believe that Terra Firma, the private equity firm run by Guy Hands, is currently in pole position to win the business, though Australian investment bank Macquarie is also said to be interested.

RWE has repeatedly said that it prefers to float the business but sources say it is more likely go to a trade buyer, especially given the market wobble in recent weeks. "A trade sale is the one route you can control," said one banker.

Hong Kong infrastructure fund CKI, Babcock & Brown Infra-structure and US private equity firm Kohlberg Kravis Roberts all looked at the business but are thought to have stepped back.

RWE may be even more eager to get out of the business after Ofwat, the water regulator, said last week it could fine Thames Water up to £140m as it missed leak-reduction targets for the fourth straight year. Thames recently won a drought order.

RWE board members also came under fire for raking in huge bonuses despite the poor performance at Thames Water. The chief executive of RWE, Harry Roels, was paid a total package last year worth €8m(£5.5m). However, sources dismissed the Ofwat charges as unimportant to the overall value of the business.

Terra Firma, which has teamed up with Citigroup, is understood to be keen to avoid a drawn-out auction by putting together a knockout equity and debt bid, provided no surprises surface in the due diligence.

"There aren't too many people who can write a £2.5bn equity cheque [like Terra Firma can]," said the banker.

Goldman Sachs and Deutsche Bank have been appointed by RWE to oversee the offloading of Thames Water.