Osprey lifts offer for AWG

The consortium trying to buy Anglican Water Group (AWG) raised its offer this week and increased its stake in the water supplier to put off potential counter-bidders.

Osprey Acquisitions – led by the asset management arm of the Commonwealth Bank of Australia and including a Canadian pension fund and private equity firm 3i, among others – lifted the price it is prepared to pay for AWG to 1,578p a share. That is 23p per share more than was agreed with AWG’s board last week and values the owner of Anglian Water at £2.25bn (US$3.3bn).

The consortium also revealed it had paid the higher price to buy up a further 9.6% of AWG shares in the market to give it 22.1% control of the company, which would make life uncomfortable for rivals.

The increased offer and stake building came amid a mounting conviction that a counter-bid was imminent. Last week, AWG shares were changing hands at a comfortable premium to the Osprey offer on the expectation that a bidding war was imminent.

Despite there being no formal counter-bid, AWG confirmed that it had been approached by several other interested parties. US investment bank Merrill Lynch and Australian buyout specialist Babcock & Brown are understood to have requested information about AWG that could help with a bid. Merrill Lynch has raised a private equity fund lately and is thought to be keen to invest in infrastructure assets.

Australian investment bank Macquarie and Alinta, another Australian infrastructure operator, were linked with AWG.

Osprey said its revised offer represented a 41.7% premium to the average price of AWG shares over the 12 months to September 13, the day before the water company revealed that it had been approached.

Hastings Funds Management, an Australian infrastructure and alternative investment fund, also recently announced that it would buy South East Water, one of Britain’s largest water-only utilities, for £665.4m.

Share valuations in the water sector have been revised in a sector review by UBS, with Northumbrian Water PLC welcoming an upgrade to ‘buy’ from ‘neutral’ following positive read-across from the Osprey offer for AWG, dealers said.

The broker said that its analysis of the AWG offer potentially produces a solid equity return in the present regulatory period and adequate returns in the next.

However, it believes that bidders are underestimating the likely impact of regulation on returns in the longer term.

The recent bids for UK water companies such as South East Water and AWG could just be the opening shot for more such offers from cash rich infrastructure funds, according to Martin Cholwill, manager of Royal London Asset Management’s equity income trust.

Cholwill said the bids reflected the demand for regulated revenue streams that the UK water companies have to offer.

“Many infrastructure funds have recently raised lots of money, are cash rich and looking for the right sort of company to invest in,” he said.

“The buyer can potentially recycle the assets that they acquire to their infrastructure fund.”

According to Cholwill, if investors in an infrastructure fund pay a management charge of 1.5% per annum, the capitalised value of this management charge is at least 30% of the price paid creating a lot of value for the manager of the infrastructure fund.

“So while debt is plentiful and cheap expect to see more such bids in the future,” he added.