The company that was so inflation-resistant, it shattered a mega-deal
KKR was two days away from bagging a bargain.
Alongside Australia’s Macquarie Group, the private equity giant was preparing to buy Britain’s largest electricity distributor, UK Power Networks, for £15bn.
For a buyouts industry that has been pushing into infrastructure funds, through which it can hold a company for a decade or more — and benefit from all of the associated fees and dividends in that time — it was a dream deal.
UKPN is not a glamorous, high-growth proposition. It gets its revenue from residents of south-east England paying their electricity bills — the kind of steady, sticky revenue you can comfortably borrow against to fund payouts to investors.
Better still, it stands to be a winner in an inflationary world, at least relatively. Like other privatised parts of the UK’s infrastructure, its returns are set by a regulator and are linked to a price index — meaning they rise with inflation. And because the business is not labour-intensive, that advantage typically outweighs the extra costs that inflation brings.
On top of that, a chunk of regulated utilities’ debt has interest payable in nominal terms, as Lex points out. That means payments on those bonds will not rise, further enhancing the returns from inflation-pumped revenues.
The company was so inflation-resistant, it turns out, that it ultimately crashed the deal.
As talks entered their later stages last month, UK inflation hit 9.1 per cent. That led the electricity distributor’s owner, billionaire tycoon Li Ka-shing’s CK Infrastructure Holdings, to increase the price just as a deal was about to be inked, the FT’s Gill Plimmer revealed.
KKR, Macquarie and the other bidders in their consortium decided the asking price was too high, and walked away.
DD reckons the buyers’ advisers Rothschild, Citigroup and Nomura were less than thrilled: due diligence had been going on for a year, one person close to the bidders said.
It’s easy to see why CK wanted a higher price.
But it must have been a significant mark-up to make the buyers back out at the eleventh hour — the person close to the bidders described the increase as “massive”.