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Global infrastructure merry-go-round whirling faster and faster
Customers are treated as a means for investors to realize outsize returns in a game of incessant financial ping-pong
Keith Mullin 20 Feb 2024
Keith Mullin
Keith Mullin

I’ve felt right in the midst of capital markets goings-on in recent weeks thanks to two isolated events. One was BlackRock acquiring Global Infrastructure Partners, the mammoth investor with US$100 billion in infrastructure assets under management, for US$3 billion and 12 million shares of common stock.

The other was FTSE 250 environmental infrastructure group Pennon acquiring Sutton and East Surrey Water (SESW) for £89 million (US$112.25 million) in a deal with a total enterprise value of £380 million. This was accompanied by a £180 million equity capital raise executed by the company’s joint corporate brokers Barclays and Morgan Stanley to keep the pro forma leverage and capital structure of the group consistent with Pennon's water business gearing range of 55% to 65%.

So what’s the connection between the BlackRock and Pennon announcements, beyond the fact that both play into the US$1 trillion go-go infrastructure investing universe? And where do I slot in?

GIP and me

Well, Sutton and East Surrey Water provides water to Gatwick Airport, one of the busiest airports in Europe, and Gatwick is owned by Global Infrastructure Partners. SESW also provides water … to me. Its catchment area covers South London and certain adjacent areas in the South East of England. Yes, I know, it’s a tenuous, potentially rather spurious link, but I’m running with it as the basis for my narrative.

In the grand scheme of things, my clean water supplier is a small company. I’m one of just 745,000 customers. But SESW’s recent history aptly demonstrates how global corporations, infrastructure funds and private equity investors have been using infrastructure assets as playthings for years in a game of unremitting and incessant financial ping-pong, where customers are treated as a means for investors to realize outsize financial returns before assets are on-sold, bolted together or stripped so the next owner can do the same thing.

When it comes to water, I’ve always strongly believed that access to clean water is a fundamental human and public-health right, not a financialized commodity to be traded between owners who don’t give a damn. Allowing water supply and wastewater treatment to be run as a series of private monopolies, as the United Kingdom has done since the sector was privatized in 1989, has always been grievously inappropriate in my opinion.

And it’s led us to where we are now: a series of water monopolies that as an industry has been roundly condemned for providing poor quality of service and serious levels of under-investment, pumping out unacceptable levels of pollution into rivers and the sea while raking in huge amounts of cash via executive pay and shareholders dividends, all while the regulator (OfWat) is asleep at the wheel.

Continuum of transactions

I worked back through the string of acquisitions SESW has been involved in over the past 20 years and then looked at the company’s most recent regulatory performance to see if I could glean any real benefits to customers.

  • Pennon acquired SESW in January 2024 from Sumisho Osaka Gas Water UK Ltd, the holding company for some of the European subsidiaries of Japan’s Sumitomo Corporation and Osaka Gas Co. Pennon already owns three UK regional water companies (South West Water, Bristol Water and Bournemouth Water), which have also been subject to long and winding histories of serial acquisition.
  • Sumitomo Corporation acquired SESW’s holding company Summit Water UK Ltd from Aqueduct Capital in 2013.
  • Osaka Gas bought 50% of Sumitomo’s stake in the same year and the two Japanese corporations ran SESW as a joint venture.
  • Aqueduct Capital was owned by infrastructure funds advised by iCON Infrastructure LLP, by Canada’s Public Sector Pension Investment Board, and Alberta Investment Management Corporation. iCON Infrastructure was formed in 2011 from a Deutsche Bank spin-out.
  • SESW was acquired by Deutsche Bank in 2006 from Terra Firma, the private equity firm founded and run by the legendary Guy Hands as a spin-out of some of the assets of Nomura’s Principal Finance Group.
  • Terra Firma acquired multi-utility East Surrey Holdings (ESH) in November 2005. SESW was one of three business lines. Two of the businesses were flipped immediately: SESW to Deutsche Bank and a UK pipelines business to ABN AMRO because Terra Firma’s only real motivation for the ESH acquisition was the company’s natural gas assets in Northern Ireland. This asset was split into three (transmission, supply and distribution) and each piece was flogged off piecemeal, the latter going to the Royal Bank of Scotland Group Pension Fund and infrastructure fund Utilities Trust of Australia.

That asset stripping took place less than 10 years after SESW had been founded as a merger between two local water companies (Sutton District Water and East Surrey Water).

And all for what?

I’ve no idea how much money has been made from me and other water customers in that almost 20-year period of truly global dealmaking but I imagine a tonne of profit has lined the pockets of owners interested only in flipping for profit.

Fast-forward to 2024 and Pennon said its acquisition of SESW is in addition to expected investment in its existing water business. In October 2023, the group committed to doubling investments to £2.8 billion between 2025 and 2030. I have no idea if that’s an appropriate amount of investment. I guess we’ll have to wait and see.

(In terms of past track record, I note that in mid-2021, as Pennon was acquiring the Bristol Water Group, it paid shareholders a special dividend of £1.5 billion following the sale in the same fiscal year of its waste management company Viridor to private equity behemoth KKR for net proceeds of £3.7 billion.)

So what can we expect of SESW under Pennon? I looked at regulator Ofwat’s Customer Measure of Experience (C-MeX) and Developer Services Measure of Experience (D-MeX) scores. These track the quality of service delivered to household customers and developers/third parties relative to service-level commitments pledged to customers. It is enlightening.

Pennon’s South West Water and SES Water were C-MeX underperformers for 2022-23, lying in 12th and 13th place, respectively, out of 17 companies. The two also ranked side-by-side in the D-MeX scores at 11th and 12th. Hardly a sense of achievement from so many corporate events.

Which brings to mind a great line I heard from an M&A banker many years ago: don’t expect to create one dry dog from two wet dogs.

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