Earlier this year, global investment bank RBC advised Hong Kong-based infrastructure investor Cheung Kong Infrastructure on its purchase of UK water provider, Northumbrian Water. With a purchase price of £2.4 billion, the takeover was the largest of a UK publicly listed company since Kraft's purchase of Cadbury in 2010.
Two RBC Capital Markets bankers, one senior and one junior, tell us about the utilities sector in general, the details of this headline-grabbing transaction, and how the team worked together to get the job done.
Name: Dai Clement
Role: Managing Director, Head of Utilities & Renewable Energy, Europe
Could you outline your career to date?
I run RBC's Renewables team here in London. I've worked across a wide range of areas during my time in banking, including debt finance and structured products, but have come to focus on mergers and acquisitions (M&A) over the last few years. Utilities and renewables work is very much about structuring cash flows and assets, so people working on deals in this sector often have backgrounds in structured finance like mine.
Could you tell us about the work of the Utilities and Renewables team?
We focus on advising clients in the Utilities and Renewables sector. However, the work is very varied - we could be looking at a regulated water company one day, a wind farm business the next, and gas-fired power stations the day after that. And because we're a sector team we get to work on a wide variety of investment banking products in addition to M&A.
How did you and your team enable the Northumbrian Water acquisition to happen?
RBC Capital Markets has a long standing relationship with CKI, and Northumbrian Water was an acquisition idea we had talked to them about. CKI are a big infrastructure investor, and the size and quality of Northumbrian appeared a good fit with their other UK utility investments. UK water industry regulation prevents any investor from owning more than a single water company and many of their competitors already owned one, allowing CKI a relatively high probability of success provided they managed to reach a price that matched board and shareholders' expectations. There have been a number of UK water acquisitions over the past five years, which provided the board and shareholders with plenty of deal precedents, and also gave our client a strong indication of what kind of deal the board would be prepared to recommend to shareholders.
What role do you as a managing director play on a deal like Northumbrian Water once the deal process is underway?
As a managing director, you need to be on top of the key strategic and tactical issues, but also aware of the results of the research and valuation work undertaken by the team, and any potential problem areas. The analysts and associates manage the detailed modelling and financial analysis, and it's important that they're allowed the freedom to get on with their job, but know to come to talk to you when a problem comes up so that we can reflect it in client discussions.
On most deals there's a vice president or director between the MD and the analysts and associates, who monitor their day-to-day work, although on a deal of this size and nature, the team is much larger with support from M&A specialists as well. It's important that everyone across the team keeps talking throughout the deal process so there are no surprises for us or our client. Things change as due diligence is completed, some for the better and some for the worse, but provided everyone is kept aware of changes there's always time to discuss solutions.
Any final thoughts on the deal?
As a result of the controversy surrounding Kraft's acquisition of Cadbury in 2009, there has been a lot of scrutiny of foreign takeovers of UK publicly listed companies. Sensible amendments have been made to the Takeover Code, but I think the current regulatory approach to these deals is the right one. It's a good thing for the UK economy that takeovers here are not regulated in a protectionist way. It means we can have international investment in our infrastructure, which promotes competition and ultimately means cheaper infrastructure for consumers.
Name: Mark McArdle
Role: Analyst, Utilities and Renewables
Could you outline your career to date?
My degree was in chemistry, but I was always interested in finance. I didn't want to go into one of the big bulge bracket banks, and heard good things about RBC - how it fared well through the financial crisis, and was increasing the size of its investment banking division.
I ended up getting an analyst position here, and it's going well. From day one, I've had client contact which I don't think someone at my level would get at a larger bank. I feel that my work is appreciated, and I get on well with my seniors, who know me as a person rather than seeing me as just another analyst.
How are you finding your work so far?
It's very interesting, particularly at the moment because there are lots of government targets for companies in this sector coming up in 2020. Billions of pounds are being pumped into these businesses, which looks set to continue for a number of years.
How were you involved on the Northumbrian Water deal?
I worked on the original pitch to the client, particularly on putting the pitch book together, and on the preparation for the subsequent follow-up meetings.
Once CKI decided that they were interested in acquiring Northumbrian Water, I was then involved in the further evaluation and research we did for them, for example, looking at how well it had been performing against its peers, what they could do potentially do with it were they to acquire it, and what sort of returns they might get under different scenarios.
Once work on the acquisition started, I was involved in working with our specialist M&A colleagues, and also with our specialist financing teams because RBC was involved in the financing of the deal as well as the M&A advisory aspects.
As on many deals of this type, the acquisition funding was secured by the assets and future cashflows of the company to be acquired, Northumbrian Water. CKI wanted Northumbrian Water to retain its BBB+ credit rating, so we had to think carefully about how we could raise as much debt as possible while not breaching the rating agencies' criteria for a BBB+ rated company.
How did the team work together on the deal?
There were two associates and I working on the deal full-time. More senior people would run meetings and come up with ideas, but were not involved so much with the day-to-day groundwork. However, they were available if we needed support, for example, to review work to ensure it made sense, and to do final checks before sending something to the client.
As the deal neared agreement, things got very pressurised. The reality is that on deals like these it becomes a seven day week experience with lots of late nights for all the team.
There's also always the worry that the deal won't go through, meaning months of wasted work, but luckily, this one went ahead - I think the day we announced the agreement was one of the best moments in the whole process, and naturally we all went for a few drinks to celebrate!
Any final thoughts on the deal?
I think I learnt a lot personally through the challenges of the experience. I've also picked up a lot of industry knowledge, which I will take into my next deal.