The £15bn takeover of Britain’s biggest electricity distributor by a consortium led by KKR and Australia’s Macquarie collapsed after inflation prompted a last-minute price hike from its Hong Kong owner.
Billionaire tycoon Li Ka-shing’s CK Infrastructure Holdings, which bought UK Power Networks for £5.5 billion in 2010, tried to raise the sale price two days before the deal was signed last month, two people close to the deal said.
The six-member consortium decided the asking price was too high and pulled out of the discussion.
The CKI’s decision was a result of a sharp rise in UK inflation, the people said, with currency movements also a factor. UK inflation is currently at 9.1 per cent, the highest level since the early 1980s.
“It is unusual to change the price at such short notice and after a year of hard work,” said a person close to the bidder. “Price expectations from vendors changed massively so we exercised cost discipline and walked away.”
Privatized infrastructure assets in the UK – including electricity, gas and water networks – benefit from rising inflation because their revenues are set by the regulator and linked to the CPI or RPI index. Profits often outweigh the costs associated with rising inflation, such as staffing, maintenance, and materials, provided businesses are not labor-intensive.
Colm Gibson, managing director at Berkeley Research Group, said interest in UK infrastructure assets is likely to remain strong despite UK government threats to impose windfall taxes on parts of the sector such as oil and gas companies and power generators.
“Since utilities’ asset values and revenue streams are indexed to inflation and backed by regulatory guarantees, these industries are considered safe havens by investors,” he said. “This is especially true from the current inflation perspective.”
UK Power Networks is the largest electricity distribution network operator in the UK, delivering to 8.3 million homes and businesses in South East and East Anglia and generating a quarter of all revenue 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 revenue from soaring customer bills as a result of high gas prices linked to Russia’s invasion of Ukraine.
According to Ofgem, the cost of electricity and gas transmission and distribution networks accounts for around a fifth of consumer bills.
The botched sale comes amid talks between Ofgem and UK electricity distribution network operators, including UKPN, over how much they will be allowed to charge customers for five years starting in 2023. Although the regulator has vowed to crack down on profits, experts say it will not affect the behavior of buyers or sellers towards the deal.
Appetite for UK infrastructure assets remains strong as the sector proved resilient to the pandemic at a time when industries such as leisure and retail suffered.
National Grid last year agreed to buy PPL Corp’s UK electricity distribution business for £7.8bn, while Macquarie bought a majority stake in Southern Water, one of the biggest water monopolies, for £1bn.
A consortium led by Macquarie bought a 60 percent stake in National Grid’s UK gas transmission business this year.
In the year to March 31 2021, UK Power Networks made a pre-tax profit of £614.8mn on revenues of £1.76bn, but paid out £237mn in dividends and £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.