Australia seeks buyer for its 23% stake in Southern Water

Exclusive: High prices for infrastructure assets, plus threat of rising rates, cited as reasons

The half-full Bewl water reservoir in Kent on April 5, 2012. The reservoir at Bewl in Kent is holding just 50 percent of its capacity as opposed to the 90 percent it would normally hold at this time of year according to Southern Water. (GETTY IMAGES)

Australia’s sovereign wealth fund Future Fund is looking for a buyer for its 23.4 per cent stake in Southern Water, the water and sewerage company covering Kent, Sussex and Hampshire.

Future Fund, which was set up by the Australian government to take on civil servants’ pensions from the 2020s, has mandated Macquarie Capital, an advisory arm of the Sydney-based bank, to advise it on the sale of its stake.

Southern, which was fined £160,000 two months ago for discharging raw sewage into the sea, provides water and wastewater services for 4.6 million people around the south coast and the Isle of Wight.

It is understood that Macquarie Capital has been asked by Future Fund to carry out a strategic review on whether to sell or keep the stake, although sources said a sale launch early in the new year is on the cards.

Sources linked Future Fund’s reasons for selling to the high prices being paid for infrastructure assets generally, as more and more institutional investors look to acquire assets in the sector.

Other reasons cited are the threat of rising interest rates, which could be damaging for highly leveraged water companies, and expected future low inflation.

Another source said Future Fund, which has owned a 17 per cent stake in Gatwick Airport since 2010, is keen to sell now because sterling has grown in strength recently against the Australian dollar.

Vincent Tchenguiz held a 6.5% interest in Southern Water from 2007 but has now sold out (Getty)

Southern Water has not paid dividends for several years to its shareholders, which own their stake through the Jersey-registered Greensands Holdings.

However, it reported post-tax profits of £167.2m for the year ending 31 March 2015 based on turnover of £828.6m. And in its annual report for 2014/15 the company said it is in a “stronger position” to “resume dividend payments from 2015-16”.

In September, Southern Water was fined £160,000 and ordered to pay £27,000 in costs to the Environment Agency by a judge at Chichester Crown Court, after its untreated waste ended up in the sea near Worthing in 2012; the company had been trying to prevent flooding.

In the same month Ofwat, the industry watchdog, named Southern Water the worst-performing water company for dealing with written customer complaints for the third year running. Future Fund manages its stake in Southern Water through an investment management agreement with an arm of UBS, the Swiss investment bank.

The fund acquired its stake in Southern Water from the Australian fund manager Challenger Infrastructure Fund, via two transactions in 2008 and 2009. At the time Challenger was backed by the media mogul James Packer and the UK property investor Vincent Tchenguiz.

The acquisition followed the takeover of Southern Water from RBS in 2007 for £4.19bn by a consortium led by JP Morgan Asset Management Infrastructure Investments Group.

Other current investors include BT’s pension scheme Hermes; Whitehelm, an Australian infrastructure investor; and UBS, which owns a 15.6 per cent stake via its UBS International Infrastructure Fund 1.

CKI, run by the 83-year-old Chinese billionaire Li Ka-Shing, holds a 4.75 per cent stake. Mr Tchenguiz, who had a 6.5 per cent interest after the 2007 buyout, is no longer involved.