Once seen as a potential buyer, KKR finally decided to pull out. In all likelihood, the deal is therefore likely to be very costly for the group's shareholders, which include major Canadian and British pension funds, as well as Emirati and Chinese sovereign wealth funds.
The two large water management companies listed in the UK, Severn Trent and United Utilities, are also not in the best of shape. Both have an equivalent enterprise value of £16.8bn and are valued for identical dividend yields, right on their historical average.
However, Severn Trent, which is based in the Midlands, has seen its earnings per share decline dramatically over the last ten-year cycle from 2016 to 2025, from £1.3 to £0.8. During this period, weak growth in operating cash flow—from £764m to £912m—was completely unable to absorb the explosion in capital intensity, with investments of £444m in 2016 compared to £1.6bn in 2025.
As a result, net debt rose from £5bn to £8.6bn, in addition to two capital increases, one small and the other quite substantial at £1bn in 2024. More seriously, dividend payments have not been covered by free cash flow for three years, which, curiously, has not yet been reflected in the share price.
The same is true of United Utilities, which focuses on the North West region, particularly the Manchester metropolitan area. Here too, we see an erosion of earnings per share between 2016 and 2025, from £0.6 to £0.4, while net debt increased from £6.8bn to £9.1bn and dividend payments have not been covered for three years.
Despite the deterioration in their financial situation, both groups have continued to increase their dividend payments regularly. Unless there is a radical change of direction, this is an unsustainable management model and a potential time bomb that, as with Thames Water, threatens to explode soon—particularly at the dawn of a new cycle of infrastructure modernization.
