Thames Water came close to collapse this year as it almost ran out of money. But after agreeing to exclusive takeover talks with the US private equity company KKR, the debt-laden utility was hoping for a quieter period as it sorted out the details.<\/p>\n
Those hopes were extinguished on Tuesday after KKR said it was withdrawing its bid<\/a> \u2013 to the shock of Thames Water and its creditors.<\/p>\n It is those creditors, some of whom bought Thames\u2019s debt at a big discount in the hope of a quick profit, who have been left \u2013 without warning \u2013 with the responsibility of pulling together billions of pounds to carry out a turnaround that could take 15 years.<\/p>\n Thames Water has been through a tumultuous year already. It had a close shave with bankruptcy, a high court battle to secure \u00a33bn<\/a> in emergency investment, and several testy parliamentary hearings. It must invest \u00a320bn over the next five years to fix leaking pipes and water treatment works, all while trying to fend off public anger over sewage in Britain\u2019s rivers and seas.<\/p>\n KKR balked at the complexity of taking on Thames amid so much scrutiny and with multiple stakeholders in play, according to a person close to the talks. Partners at the private equity firm had carried out 10 weeks of intensive due diligence, including several visits to wastewater treatment works, and had relied on a small army of up to 200 advisers to carry out detailed assessments. The state of some of the Thames assets was worse than KKR had initially thought, according to another source.<\/p>\n New York-based KKR, short for Kohlberg, Kravis Roberts, had deployed 15 members of its European infrastructure team, run by the executive Tara Davies, to work on the bid, with James Gordon serving as the lead partner. (Both formerly worked for Macquarie, the Australian investment bank criticised for taking dividends from Thames while building up debt<\/a> \u2013 although they are not thought to have worked on the water company.) Yet over the weekend KKR brought out one of its big guns to try to sweet talk the government: Henry Kravis, one of the co-founders, called up Labour\u2019s business adviser Varun Chandra to discuss the plan. Sky News first reported the call.<\/p>\n KKR has rarely been shy of potential controversy<\/a>, ever since its infamous 1988 buyout of the US conglomerate RJR Nabisco was depicted in the book Barbarians at the Gate. However, several people close to the Thames Water situation have said they believed KKR also became concerned about the political risks associated with it, such as the possibility of intense public scrutiny leading to a stricter approach from the government on enforcement.<\/p>\n A government spokesperson said: \u201cThe government makes no apology for tackling the poor behaviour we have seen in the past, where too many people were rewarded for failure,\u201d but added: \u201cWe welcome investors who want to work with us to rebuild this vital sector and clean up our rivers, lakes and seas.\u201d<\/p>\n Ofwat, the water regulator for England and Wales, last week laid down the gauntlet to KKR with \u00a3123m in new penalties<\/a> mostly related to environmental breaches involving sewage spills.<\/p>\n KKR\u2019s bid hinged on convincing regulators including Ofwat and the Environment Agency to grant it leniency on fines, penalties and other costs amounting to billions of pounds, as revealed by the Guardian<\/a>.<\/p>\n \u201cThere were always going to be three people in the marriage,\u201d wrote Helen Rodriguez, the head of European special situations at CreditSights, a bond rating agency: Thames Water, KKR and Ofwat. KKR may have been put off by \u201cthe inevitable drip of more fines to come\u201d, and decided it was not worth going through a month of meetings in June to try to reach a compromise, she added.<\/p>\n Thames Water has hired its own army of advisers, including the law firm Linklaters. It is understood the Linklaters lawyers involved have included Alison Saunders, formerly the UK\u2019s director of public prosecutions, and Jonathan Jones, a former head of the government\u2019s legal department. Saunders has previously acted for Southern Water on a criminal investigation, while Jones acted for the energy company Bulb during its special administration. Linklaters declined to comment.<\/p>\n Keir Starmer\u2019s office received a courtesy call from KKR before the announcement. The government is hoping to avoid involvement.<\/p>\n The environment secretary, Steve Reed, told parliament on Tuesday there remained \u201ca market-led solution on the table\u201d as he categorically ruled out a permanent nationalisation.<\/p>\n skip past newsletter promotion<\/a><\/p>\n Sign up to Business Today<\/p>\n Get set for the working day \u2013 we’ll point you to all the business news and analysis you need every morning<\/p>\n Privacy Notice: <\/strong>Newsletters may contain info about charities, online ads, and content funded by outside parties. For more information see our Privacy Policy<\/a>. We use Google reCaptcha to protect our website and the Google Privacy Policy<\/a> and Terms of Service<\/a> apply.<\/p>\n after newsletter promotion<\/p>\n However, Reed acknowledged that the government was ready to put Thames Water into a special administration regime \u2013 akin to a temporary nationalisation \u2013 if required.<\/p>\n Yet the \u201cmarket-led solution\u201d leaves the government with the prospect of the UK\u2019s biggest water company being owned by a group of creditors that includes US hedge funds \u2013 such as Elliott Investment Management and Silver Point Capital \u2013 which are known for controversial tactics, as well as big institutional investors such as Aberdeen, BlackRock, Invesco and M&G. It is an unwieldy group of 100 companies, holding \u00a313bn in Thames Water bonds. The investment bank Jefferies is acting as the group\u2019s main financial adviser.<\/p>\n Despite the financial pressure Thames is under \u2013 and the cash burn required to fund its operations \u2013 the water company has covered the costs of as much as \u00a315m for due diligence checks that KKR spent on exploring the state of the vast business. Much of that information has already been shared with the creditor group, and will now be used to inform their talks with Ofwat.<\/p>\n However, the creditors must race to secure a deal as Thames burns through the first \u00a31.5bn of the emergency cash it borrowed to fund its day-to-day operations.<\/p>\n