Vivendi grab for Southern Water

CONTROL of water supply to a million households in the South East of England moved across the Channel today as Vivendi Environnement took over Southern Water. The deal, worth £2.05bn, had been expected since Southern was sold to a group of banks and investors by Scottish Power in March. It will almost certainly be referred to the Competition Commission.

Regulator Ofwat has said that any takeover of UK water businesses should be studied. Such an enquiry could take anything from six months to a year to complete.

Vivendi, led by director-general Henri Proglio, already owns two British water companies, Folkestone and Dover Water Services and Three Valleys, covering the northern and western outskirts of London and the Home Counties. Today's deal will give it 10% of the UK market.

If Vivendi's bid is cleared almost the entire South of England water supply and sewerage treatment will be in foreign ownership. Thames Water is owned by German giant RWE, WestLB owns Mid-Kent, France's Bouygues owns South East Water and Malaysia's YTL recently paid £1.24bn for Wessex Water. Ten UK water companies supplying 26m households will be foreign-owned.

The banking consortium, First Aqua, was set up by Citigroup and its debt led by Royal Bank of Scotland. It is selling Southern Water to the French for the same £2.05bn price it paid to Scottish Power. In the meantime, its debt holders are paid interest and the equity holders receive much of Southern Water's free cashflow in dividends. Water companies are highly cash generative, although Ofwat imposes strict controls on how much dividend they pay in relation to investments in infrastructure.

First Aqua was keen to point out today that it had not simply been warehousing Southern for Vivendi, saying it could carry on owning the business and making good returns if Vivendi's bid was blocked.

Vivendi has long been seen as the most likely buyer for Southern but could not get through the regulatory timetable quickly enough to satisfy the cash-strapped Scottish Power when it first put up an offer of £1.7bn last year. The First Aqua solution was seen as a neat way out.

It also allowed Vivendi to structure its deal. Its Vivendi Water UK subsidiary will put up only e680m (£425m) in equity, the rest coming in debt from a consortium of outside financiers.