Macquarie Asset Management has today announced it has reached an agreement to acquire a majority stake in Southern Water Services Limited ('Southern Water').
Southern Water provides essential services to 2.6 million water and 4.7 million wastewater customers across Kent, Sussex, Hampshire, and the Isle of Wight. Under the agreement reached with Southern Water's existing shareholders, Macquarie Asset Management will invest, on behalf of long-term investors including pension funds and insurance companies, over £1 billion in new equity to recapitalise the business and implement a more sustainable financing strategy for Southern Water.
The capital injection will enable Southern Water to invest significantly to upgrade its network with £2 billion to be invested over the next four years of the current regulatory period to fix the pipes, pumping stations, and sewers which are underperforming and causing harm to the local environment.
This major investment programme is equivalent to approximately £1,000 for each property in Southern Water's catchment area and will allow Southern Water to access the resources it needs to improve its operational and financial performance, financial resilience, and relationship with its customers.
Macquarie Asset Management has consulted extensively with Ofwat, the regulator of water and wastewater services in England and Wales. Outlined in an open letter to Ofwat viewable here, Macquarie Asset Management's intentions for and commitments to Southern Water for the remaining four years of the regulatory period to 2025 to accelerate its transformation include:
- Strengthening a zero-tolerance mindset to environmental pollution: a commitment to significantly improving Southern Water's environmental track record, which Macquarie Asset Management recognises is one of the worst performing in the UK water sector. The Company is implementing plans to reduce pollution incidents by more than 50% (compared with 2019 pollution incidents) over the next four years. There may be incidents, particularly in the next few years, but Macquarie Asset Management knows there will be a very low tolerance for such events amongst Southern Water's management and the board.
- Reducing leaks: via Southern Water's significant investment programme, a commitment to reduce the number of water leaks to move closer to the PR19 ambition. The investment programme includes approximately £230 million of funding to upgrade Southern Water's infrastructure, which management believes is critical to improving the quality and resilience of water and wastewater services, including to both minimise and manage pollution incidents more effectively.
- Ensuring affordable customer bills: between now and 2025, a commitment to ensure average water and wastewater customer bills, in aggregate, do not rise by more than inflation. This commitment is in addition to honouring an existing £123 million customer rebate due to historical incidents.
- Improving customer service: an aim to improve Southern Water's customer service from the second worst performing in the UK water sector by addressing the root causes of complaints and enhancing Southern Water's capacity to handle them more effectively.
Leigh Harrison, Head of Macquarie Infrastructure and Real Assets, said: "Southern Water needs significant investment to improve its operational and environmental performance, and financial health. Without it, the business will be unable to fulfil the expectations of the millions of customers that rely on its services each day or reduce its negative impact on the local environment.
"This major £1 billion equity investment by one of our long-term infrastructure funds will help put Southern Water back on a stable footing and enable an ambitious multi-year transformation plan to make essential water and wastewater services in the South East of England more sustainable and resilient.
"While we expect Southern Water will have made substantial progress in addressing its issues by the end of 2025, we acknowledge the business' transformation will take time and that is why we intend to own our stake in Southern Water over multiple regulatory periods."
Keith Lough, Chair of Southern Water, said: "We wholeheartedly welcome Macquarie Asset Management's investors as long-term shareholders of our business. A £1 billion equity investment in Southern Water and its group strengthens our balance sheet to enable Southern Water to increase investment in our network and accelerate the transformation plans we have put in place."
Ian McAulay, Chief Executive Officer of Southern Water, said: "This is good news for our customers, the local environment, and the regional economy. This investment ensures we will be able to spend more than £2 billion in the next four years improving the resilience of our existing network to reduce pollution incidents and leakages. It strengthens our ability to tackle the longer-term challenges posed by climate change and population growth, at the same time as being responsible custodians of Southern England's rivers and seas. With our long-term shareholders' support, we are fully committed to protecting the local environment and providing the quality of service our customers deserve.
"Importantly, this new investment will help Southern Water create around 1,000 new jobs and expand our apprenticeship programme, assisting the economic recovery of our region as we tackle the global Covid-19 pandemic."
Macquarie Group has operated in the UK for more than 30 years, opening its London headquarters in 1989. Today, Macquarie is one of the largest investors in the UK, having invested and arranged more than £50 billion in infrastructure projects since 2005.
