Last updated: July 1, 2011 7:45 pm

Northumbrian confirms Li Ka-shing approach

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A takeover of Northumbrian Water by an investment vehicle owned by Asian tycoon Li Ka-shing moved a step closer on Friday after the company confirmed it had received a potential cash offer from the Hong Kong listed fund.

“There can be no certainty that an offer will be made,” Northumbrian said on Friday. “A further announcement will be made when appropriate.”

Earlier in the week Mr Li’s Cheung Kong Infrastructure Holdings (CKI) announced that it was considering a cash bid for Northumbrian, which has an enterprise value of £4.43bn ($7.08bn).

CKI already owns British infrastructure assets including interests in Northern Gas Networks, Seabank power station in Bristol, Cambridge Water, and has a 4.75 per cent stake in Southern Water.

The fund is being advised by Royal Bank of Canada and HSBC on its potential offer.

CKI is also working on the disposal of its stake in Cambridge Water as part of its potential offer for Northumbrian.

It is believed CKI has already identified a buyer for that, but any sale would likely be conditional on a purchase of Northumbrian Water being completed.

The move would avoid an automatic referral of the takeover to the competition commission, which analysts estimate would likely extend the completion of a deal by a year. Deutsche Bank is advising Northumbrian Water. All parties declined to comment.

The confirmation earlier this week by CKI of its potential bid for Northumbrian sparked concerns from several MPs from the north-east of England about the future of the water company’s 3,000 staff.

The utility serves 2.6m people in the north east, while Northumbrian Water Group also operates Essex & Suffolk Water, and has interests in Scotland, Gibraltar and Ireland.

The potential takeover would be the largest in the UK water sector since 2007.

It comes on the heels of plans by Agbar, the Spanish water specialist that is majority-owned by France-based Suez Environnement, to sell a 70 per cent stake in Bristol Water.

First round bids were expected on Friday, according to people familiar with the situation.

The stake, which could be valued at about £100m, is expected to attract bids from infrastructure funds including Itochu and Marubeni.

A consortium led by CKI also bought EDF ’s UK power networks for £5.8bn a year ago and was also among the parties that were interested in Eon’s UK business, Central Networks, which was snapped up by US power group PPL for £4bn this year.

CKI still makes most of its income from its Hong Kong electricity company, but the company has been increasing its portfolio in Australia, New Zealand, Canada and the UK since 1999.

The company has pursued assets in developed Commonwealth countries because they offer regular returns and regulatory and legal environments similar to Hong Kong’s.

Following the EDF acquisition, the UK became CKI’s largest foreign market, accounting for nearly a quarter of last year’s HK$5bn in net profit.

CKI shares in Hong Kong have risen by nearly 40 per cent since it announced its bid for EDF Energy Networks last year, giving the company a market capitalisation of HK$91bn. The company is majority-owned by Mr Li’s listed telecoms to ports conglomerate Hutchison Whampoa.

The concerns about the possible Northumbrian takeover have similarities with the fears raised when Kraft mounted a hostile takeover of Cadbury, which it completed last year. That episode led to proposed changes to rules governing Britain’s mergers and acquisitions, such as cutting the time a company can be considered “in play”.

The biggest shareholder in FTSE 250 group Northumbrian is the Ontario Teachers’ Pension Plan, with a 27 per cent stake.

The group’s other large shareholders include Invesco, Legal & General and Artemis.

Shares in Northumbrian, up nearly 40 per cent over the past 12 months, on Friday were flat at 415.6p.

Additional reporting by Enid Tsui in Hong Kong

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