UPDATE 2-China buys into Thames Water as UK courts investors

Fri Jan 20, 2012 6:40am EST

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* CIC buys 8.68 pct stake in Thames Water

* Analysts say deal could be worth between 600-700 mln stg

* Follows buy of Northumbrian Water by a Hong Kong investor

* China has also bought assets in Portugal, Greece

By Adveith Nair

LONDON, Jan 20 (Reuters) - China's $410 billion sovereign wealth fund has bought a minority stake in London water supplier Thames Water in an early sign that concerted efforts to drum up foreign investment in Britain's ailing economy may be paying dividends.

British finance minister George Osborne was in Asia this week and Prime Minister David Cameron last Friday visited Saudi Arabia as part of a drive to lessen dependence on a bruised banking industry and trade with the crisis-hit euro zone.

China Investment Corporation (CIC) said it had bought an 8.68 percent stake in Thames Water from a group of investors led by Australia's top investment bank Macquarie.

CIC did not say how much it had paid but analysts put the likely value of the deal at between 600 million and 700 million pounds ($0.9 billion - $1.1 billion).

Thames Water has been bringing in major investors as it embarks on a 5 billion pound investment programme that forms part of a wider drive to overhaul Britain's ageing water supply system. The Abu Dhabi Investment Authority acquired a 9.9 percent stake in the company in December.

For CIC, the deal gives it access to the stable returns offered by British water companies.

High rates of inflation last year, from which British water operators are shielded by regulations governing price increases, highlighted the appeal of such companies to infrastructure investors seeking safe, predictable, long-term cash flows.

Friday's deal follows Hong Kong tycoon Li Ka-shing's acquisition of British utility Northumbrian Water last year for just under $4 billion.

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"The fact that people are still interested in water companies is a small positive [for listed UK water firms]," Investec analyst Angelos Anastasiou said. "Over the medium term, there is potential (for more of such deals)."

Britain has three listed water companies: Pennon, Severn Trent and United Utilities. Their shares were broadly flat on Friday.

Investors and cash-rich sovereign wealth funds from emerging economic powerhouses are among the most active players in an otherwise sluggish M&A market, snapping up stakes in strategically important resources and bargains in crisis-hit countries.

China has made no secret of its interest in buying plum European assets as the euro zone grapples with a debt crisis and countries such as Britain struggle to reduce ballooning deficits.

Lou Jiwei, the chairman of the CIC, has previously said China is keen to invest in outdated infrastructure in Western countries, especially Britain.

State-owned China Three Gorges last year signed a deal to buy a stake in top Portuguese utility EDP and Chinese state shipping firm COSCO has invested in Greece's biggest port in Piraeus

Thames Water, which supplies water and sewerage services to London and some surrounding areas, was bought by Macquarie-led Kemble Water Holdings from German utility RWE in 2006 for 8 billion pounds.

Osborne, who is looking to boost investment in British infrastructure as a way of lifting the British economy out of the doldrums, welcomed Friday's announcement.

"It is a vote of confidence in Britain as a place to invest and do business," he said. "This investment is good news for both the British and Chinese economies."

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