SSE ready to move on Thames Water

SCOTTISH & Southern Energy is believed to be mulling a bid for the up-for-sale utility Thames Water - a deal that would be the company's biggest acquisition since its 1998 merger.

Sources told The Scotsman that the Perth-based utility had "people tasked with looking at water" as it seeks to add a third arm to its existing gas and electricity infrastructure assets. The group would not comment on the possibility of an offer for Thames, but it is known to be monitoring the situation closely.

RWE - the German owner of Thames - has said it wants rid of the water utility, which could be valued at 7-8 billion. It said last week that it would consider a "dual-track" strategy for the disposal - meaning it would work towards a stock market floatation while listening to any outright bids for the group. The process is due to start next month.

Analysts were bullish about the possibility of a bid from SSE, although none thought that the company could act independently. "It can't afford it on its own, but would bid as part of a consortium," one analyst said. "It would then take an equity stake in the firm as well as the management role."

The most likely partner is believed to be the Ontario Teachers' Pension Plan, which runs infrastructure investments on behalf of a number of Canadian funds. The two parties teamed up with fellow Canadian group Borealis Infrastructure Management to acquire two regional gas distribution works from National Grid Transco in 2004.

That deal was valued at just 3.1bn, less than half the amount that would be required to win Thames. However, it went down well at the time with both analysts and investors, who praised the structure of the deal.

"They bid aggressively for those assets due to the low cost of the capital funds," another analyst said. "SSE also managed to get a favourable treatment on their credit rating."

Other factors supporting an SSE bid include the geographic fit with the company's Southern Electric division, and chief executive Ian Marchant's popularity in the City. "An SSE consortium would have a fair chance," a source familiar with the situation said. "They would be silly not to look at it."

If it bids, SSE is likely to face competition from a string of other parties. Private equity guru Guy Hands has been widely tipped to get involved in the auction, as has Hong Kong's Cheung Kong Infrastructure Holdings, majority owned by Hutchison Whampoa.

However, SSE is unlikely to be challenged by its fellow UK-based gas and electricity utilities. Arch rival ScottishPower sold its Southern Water division to a Royal Bank of Scotland-led consortium in 2001, while E.ON and EDF have distractions on the continent. United Utilities' Philip Green recently ruled out a bid.

"SSE is the only utility player interested in multi-utility," a source said. "Whoever buys Thames will need some operational excellence, and no-one has that more than SSE."

Heavyweight contender

RWE - the German owner of Npower - put its Thames Water subsidiary up for sale earlier this year. At the group's results last week, it said it would also consider listing the firm, but is open to offers from potential buyers of the company.

Thames Water supplies water to 13 million customers in and around London, as well as sewage services to eight million. But it has been mired in controversy in past weeks as regulator Ofwat revealed that it was wasting 915 million litres a day - equivalent to more than 700 swimming pools every 24 hours. That went down particularly badly in the wake of growing fears surrounding the country's worst drought for a century. RWE also unveiled profits for the first quarter up 7 per cent.

Water deals have become common. A Royal Bank of Scotland-led consortium recently upped its stake in Southern Water, once owned by ScottishPower.