Watchdog ruling hits £7bn Thames Water sale

The water regulator dealt a blow to the forthcoming sale of Thames Water yesterday by announcing plans to strengthen the ring- fencing of the company to prevent any future owner removing cash or assets from its regulated business.

The so-called "cash lock-up" arrangement is similar to that already included in the licences of energy companies and is designed to ensure Thames has sufficient resources to conduct its job properly and safeguard consumer interests. Ofwat said the new licence condition would be triggered if Thames' investment grade rating was threatened in any way.

Bidders for the company warned the regulator's intervention would make it more difficult for Thames' owner, RWE of Germany, to achieve the maximum price for the company. Any new owner will be restricted in the amount of cash that can be taken out of the regulated business to service debt taken on to finance the purchase. "This is not helpful in terms of getting a top-dollar price for Thames,"one bidder said,

RWE hopes to raise £7bn from the sale of Thames. Three private equity groups - Guy Hands' Terra Firma, the Australian bank Macquarie and a consortium of Qatar's state investment company and UBS - are preparing offers. The deadline for bids is 9 October.

If RWE fails to achieve a private sale of Thames, it intends to go ahead with a public offer of shares instead.

Ofwat said it intended to extend the cash lock-up arrangement to all water companies over time, acting when a suitable opportunity arose such as a refinancing or change of ownership. RWE is taking an estimated £400m out of Thames as part of a complex refinancing of the company announced earlier this week which will see it loaded up with more debt.

Ofwat said it saw "no significant regulatory problem" with the restructuring, although both Moody's and Standard and Poor's cut their credit rating on Thames by a notch.