October 5, 2011 / 12:30 PM / 8 years ago

UPDATE 2-Canada's Capstone buys 70 pct in Bristol Water

* Capstone Infrastructure to pay about $202 mln

* Deal funded through credit, cash, debt facility

* Suez Environnement to continue to hold 30 pct interest (Adds more detail, background)

LONDON/PARIS, Oct 5 (Reuters) - Canada’s Capstone Infrastructure Corp. said it bought a 70 percent stake in Bristol Water, a British unit of France’s Suez Environnement , for C$215 million ($202 million), to cash in on the stable, long-term returns offered by British water utilities.

A rise in inflation this year, from which British water utilities are shielded through regulated returns, has increased the appeal of such companies to infrastructure investors seeking the safety of predictable, long-term cash flows.

The deal announces on Wednesday comes just three months after Hong Kong tycoon Li Ka-shing agreed to buy British utility Northumbrian Water for just under $4 billion.

“Bristol Water is an established, core infrastructure business with regulated and predictable inflation-linked cash flow and a strong growth profile in a stable OECD country, making it an ideal complement to our existing portfolio,” Capstone Chief Executive Officer Michael Bernstein said.

Bristol Water is regulated by Ofwat through a price cap mechanism on five-year rate cycles. The utility is expected to register an annual growth of about 8 percent in adjusted EBITDA core profit from 2012 to the end of the current five-year period, which runs until March 2015.

Capstone expects its investment in Bristol Water to deliver a total return at the lower end of its targeted 10-14 percent range, and said the acquisition will help sustain its annual dividend of 66 Canadian cents through 2014.

The company funded the deal through a combination of existing credit facilities, cash in hand and a new C$150-million senior debt facility. Suez Environnement will continue to hold a 30 percent interest in Bristol Water.

The deal values Bristol Water at about 1.2 times its regulated capital value (RCV), the valuation of assets set by the watchdog. The RCV of the business as at the fiscal year ended March 31 was about C$505 million.

In the sector’s previous M&A cycle, infrastructure funds, private equity firms and pension funds sometimes paid premiums as high as 30 percent to RCV. The likes of Pennon , Severn Trent and United Utilities still trade at premiums to RCV due to residual bid hopes.

Bristol Water treats, stores and distributes water, supplying around 278 million litres every day to over 1.1 million people and businesses in and around the city of Bristol. ($1 = 1.062 Canadian Dollars) (Reporting by Adveith Nair in London and Dominique Vidalon in Paris; Editing by James Regan)

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