Utility Stocks: The Hottest Takeover Target in Britain

Strategic Insights -

The UK's utility sector, once considered a stronghold for conservative investors, has become a prime target for private equity firms and foreign bidders. Over the past two years, these companies have been snapped up at an unprecedented rate, with domestic and foreign competitors, consolidators, and private equity funds taking large chunks of share capital out of the market. Regulated monopolies, such as water and electricity distribution networks, offer a steady, low-risk income stream, making them particularly attractive to private equity firms seeking to exploit loan leverage and cut tax bills.

Key Takeaways:

  • Utility stocks have become the hottest takeover sector in Britain, with companies such as ScottishPower, Thames Water, and AWG being targeted by private equity firms.
  • Regulated monopolies, such as water and electricity distribution networks, offer a steady, low-risk income stream, making them attractive to private equity firms.
  • The essence of the private equity proposition is to exploit loan leverage and cut tax bills by financing as much as possible of the purchase with loans.
  • Only a quarter of ScottishPower's business is represented by wires, with most of the value in power generation or supply.
  • British utilities are nearly always defenceless against takeover bids, contrasted to most continental utilities which have some form of protection against a bid raid.
  • The UK is the most popular place for bids due to its business model emphasis on size and diversification between generation, distribution, and supply.

Statistics:

  • Over the past two years, utility stocks have been snapped up at an unprecedented rate.
  • Regulated monopolies, such as water and electricity distribution networks, offer a 26% profit rise in the first nine months of the year.
  • ScottishPower has been a candidate for takeover ever since its extravagant domestic and American expansion strategy had to be unwound.
  • Iberdrola, Spain's second biggest power company, posted profits of €1.24 billion in the first nine months of the year.
  • Iberdrola has been expanding in the Middle East, including a £839 million contract to build a wind power plant in Qatar.
  • Grupo Ferrovial bought BAA, the airports operator, for £8.75 billion in June.
  • Telefonica, the Spanish telecommunications giant, took over O2, the mobile phone operator, in October last year for £17.7 billion.

Sources:

  • The Times, 2006
  • VISMEDIA (Photographer)
  • Iberdrola (Company profile)
  • Grupo Ferrovial (Company profile)
  • Telefonica (Company profile)