Thames Water lobbies PM on takeovers

THAMES WATER, the country's biggest water company, has stepped up its campaign to be allowed to take over other UK suppliers by lobbying Tony Blair's office directly.

Bill Alexander, chief executive of Thames, is understood to have briefed senior officials in the Downing Street policy unit and the Treasury last week, highlighting the way the current block on mergers puts UK water companies at a disadvantage.

Thames and other suppliers are urging the Government to allow domestic mergers to give the UK water industry the muscle to take on French and American rivals in the $300bn (pounds 185bn) global water market.

Thames also argues that the resulting economies of scale will permit the industry to deliver the domestic price cuts demanded by the regulator, Ian Byatt, and fund an pounds 8.5bn environmental clean-up programme.

The lobbying campaign comes as Thames opens an office in Rio de Janeiro in readiness to bid for the $1bn privatisation of the city's water supply. Mr Alexander flew to Brazil last night and will open the office, accompanied by the city's Governor, tomorrow.

This will make Thames the first foreign water company to step back into the Brazilian market. Foreign bidders pulled out last autumn after the financial and political upheaval in the country.

Thames originally planned to bid in a consortium with the two French water giants, Vivendi and Suez-Lyonnais des Eaux, but may now look for other European or US partners to expand into Brazil.

Its target is to capture 50 per cent of the Brazilian water market, doubling the number of customers it serves worldwide to 40 million.

It already has international operations in Australia, Turkey and Indonesia, where Thames supplies half the capital city Jakarta. Vivendi is thought to have approached Thames last year with a pounds 400m offer to take over its international division.

But the company is arguing that it is being hampered in its attempts to expand overseas because of its smaller size. With a market capitalisation of pounds 3.45bn, Thames is only one-fifth the size of Vivendi and less than one-third the size of Enron of the US, which took over Wessex Water last year.

The smaller size of Thames and the tight regulatory cap are also reflected in its market rating. The company is on a earnings multiple of only nine times compared with 37 and 35 respectively for Vivendi and Suez-Lyonnais des Eaux, and 31 for Enron.

Mr Alexander said this made it more expensive for Thames to raise capital and also left the company more vulnerable to takeover by a foreign predator. Two of Britain's ten big water companies are foreign-owned.

A recent analysis by the stockbrokers WestLB Panmure rated Thames as the UK water company best positioned to take advantage of overseas opportunities and said that its shares were undervalued by as much as 12 per cent.

The report also forecasts that Mr Byatt's forthcoming price review could cut Thames' profits before interest in its core water and sewage business from pounds 475m to pounds 369m in 2001.

The regulator has proposed a one-off cut of between pounds 20 and pounds 30 in Thames' average bill of pounds 205 for next year, and says the company has the capacity to keep bills below their current levels for the following four years.

Thames has offered to cut water bills by pounds 10 next year and then increase them by pounds 5 a year in real terms over the following four years.

Mr Byatt is set to publish his price limits at the end of July.