The £15bn takeover of Britain’s largest electricity distributor by a consortium led by KKR and Australia’s Macquarie has collapsed after rising inflation prompted a last-minute price rise by its Hong Kong owner.
Billionaire tycoon Li Ka-shing’s CK Infrastructure Holdings, which bought UK Power Networks for £5.5bn in 2010, tried to increase the sale price just two days before an agreement was due to be signed last month, according to two people close to the deal.
The six-member consortium decided the asking price was too high and pulled out of the discussions.
CKI’s decision was the result of the sharp rise in UK inflation, the people said, with currency movements also a factor. UK inflation is currently running at 9.1 per cent, its highest level since the early 1980s.
“It was unusual for the price to be changed at such short notice and after a year of due diligence,” said one person close to the bidders. “The price expectations from the seller massively changed so we exercised cost discipline and walked away.”
Privatised infrastructure assets in the UK — including the electricity, gas and water networks — benefit from rising inflation because their returns are set by the regulator and linked to either the CPI or RPI index. The benefits generally outweigh the costs associated with rising inflation, such as staff, maintenance and materials, as the businesses are not labour-intensive.
Colm Gibson, managing director of Berkeley Research Group, said interest in UK infrastructure assets was likely to remain strong despite UK government threats to impose windfall taxes on parts of the sector such as oil and gas companies and electricity generators.
“Because utilities’ asset values and revenue streams are both indexed to inflation and backed by regulatory guarantees, these industries are regarded as safe havens by investors”, he said. “This is particularly true given the current inflation outlook.”
UK Power Networks is the largest electricity distribution network operator in the UK, transmitting to 8.3mn homes and businesses in the south-east and East Anglia, and earning about a quarter of all revenues in the sector.
The company came under pressure after thousands of customers were left without power during storms in recent months. It is one of six monopoly network companies that operate Britain’s pipes and wires, and derive all their revenues from customer bills, which are soaring as a result of higher gas prices linked to Russia’s invasion of Ukraine.
The cost of the electricity and gas transmission and distribution networks accounts for about a fifth of customer bills, according to Ofgem.
The botched sale took place amid talks between Ofgem and the UK electricity distribution network operators, including UKPN, over how much they will be allowed to charge customers for the five years starting in 2023. Although the regulator has pledged to crack down on profits, experts said this would not have affected either the buyers’ or vendor’s attitude towards the deal.
Appetite for UK infrastructure assets has remained strong because the sector proved resilient to the pandemic at a time when industries such as leisure and retail suffered.
National Grid agreed last year to buy PPL Corp’s UK electricity distribution business for £7.8bn, while Macquarie bought a majority stake in Southern Water, one of the largest water monopolies, for £1bn.
A consortium led by Macquarie also bought a 60 per cent stake this year in National Grid’s UK gas transmission business.
In the year to March 31 2021, UK Power Networks delivered a pre-tax profit of £614.8mn on revenues of £1.76bn, while paying out £237mn in dividends as well as £76.9mn in interest on shareholder loans. Li Ka-shing’s empire bought UK Power Networks from France’s EDF in 2010.
Macquarie and KKR declined to comment. CKI did not respond to requests for comment.
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