Thames Picks KKR as Potential Owner to Lead it Out of Crisis

(Bloomberg) -- Thames Water selected KKR & Co. as its preferred partner for the next stage of its efforts to raise equity and turn around the debt-laden business. 

Britain’s largest water and sewage company aims to reach an agreement with the US alternative asset manager by the end of the second quarter of 2025, Thames said in a statement on Monday, with a view to finalizing a recapitalization in the second half of this year. The decision means that other offers from bidders including Castle Water Ltd. are off the table for now, according to two people familiar with the process.

Choosing a preferred bidder is a step forward in a complex process toward a comprehensive restructuring and relaunch of Thames Water. The firm has long been weighed down by debts that have seen its owners write off the value of their stakes to zero. Beyond its financial woes, the utility has been criticized for its poor environmental record, which has landed it with hefty fines from regulator Ofwat.

The company recently obtained a £3 billion ($3.9 billion) emergency loan from its creditors to stave off insolvency, but a long-term solution requires new capital coming in, as well as some concessions from creditors to lighten the company’s debt pile. And so Thames has been looking for a new owner to finance a turnaround plan after existing shareholders declared the business “uninvestible.” Other than KKR, suitors included Castle Water, Covalis Capital and CK Infrastructure Holdings. 

No Asset Sales

The US alternative asset manager, which has been expanding its investments in infrastructure, doesn’t plan to sell any assets of Thames Water, nor make structural changes if it gets control of the business. Bloomberg News had previously reported that KKR had offered to inject up to £4 billion into the troubled utility. Thames Water hired Rothschild & Co. to run the official equity process.

On top of carrying out the due diligence and agreeing the terms of the offer with Thames Water, KKR will also have to discuss the firm’s future debt structure with the creditors. The KKR proposal indicates a “material impairment” for its senior Class A creditors, the statement said, without offering further details. KKR’s spokesperson declined to comment on the process.

Still, people familiar with the situation said that KKR and creditors will work towards a consensual deal, which may entail a conversion of some debt into a minority equity stake. Thames declined to comment further than the statement.

Existing Creditors

The Class A group — which backed the company in its plan to raise £3 billion — includes funds ranging from Elliott Management, to Silver Point Capital, Apollo Global Management and PIMCO. 

The company’s capital structure also currently includes some Class B debt, which ranks junior to the Class A liabilities. The holders, led by Polus Capital Management, challenged the loan in court because they deemed it too expensive and put forward their own offer to rescue the company from a potential special administration. 

Thames said last month it would appeal to Britain’s Competition and Markets Authority to examine Ofwat’s decision. It has since asked to push back that referral for as long as 18 weeks, allowing it to complete the recapitalization. Ofwat agreed to that request earlier in March. 

(Updates with more information from second paragraph onwards)

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