Bidders must think they can squeeze more from Kelda

Pure water has been the favourite tipple of leveraged buy-out firms and infrastructure funds in recent years. But many expected their thirst to be tempered by the credit squeeze. Apparently not. Thursday’s £3bn approach to Kelda, owner of Yorkshire Water, follows bids for Southern Water and South Staffordshire Water last month. As the water utilities distill themselves back to their origins, shedding divisions built up or bought when diversification was in vogue, so their old-fashioned virtues seem to become more attractive.

Kelda itself is looking at an offer that values the group at a near-30 per cent premium to regulated asset value. That valuation was seen as generous when a JPMorgan fund led the bid for Southern Water last month. It is certainly no insult to the impressive Kevin Whiteman’s skills as Kelda’s chief executive although he will regret the regulatory restrictions that may force him to realise shareholder value by selling the group rather than using it as a base for consolidation in the sector.

Given the high operational standards of Yorkshire Water, however, what more could Citigroup, HSBC and their partners in the bidding consortium squeeze from Kelda? Perhaps, in these straitened times, the steady drip-drip of utility income is sufficient reason to pay up – in which case, generous bids for other available assets, notably Severn Trent and United Utilities, or even a counter-offer for Kelda, should not be ruled out.

Goldman bets on CMC

Thanksgiving is not a holiday for gift-giving, but Peter Cruddas, who revels in the fact he is one of the City of London’s richest men, received a handsome one from Goldman Sachs on Thursday. The US investment bank agreed to take a 10 per cent stake in CMC Markets, Mr Cruddas’s spread-betting firm. If the deal goes through, it could be worth £140m to the self-made entrepreneur and his lavishly endowed charitable foundation.

For Goldman, it is a simple and relatively small wager on the growth of retail derivatives trading and investment worldwide. As recently as the early 1990s, you would have been laughed off the trading floor for the idea that ordinary investors might be tempted into such arcana. But the internet has fuelled the spread of spread-betting and the use of contracts for difference to dodge stamp duty on regular equity trades.

Mr Cruddas said in an interview earlier this year he had turned down offers for his business at £2m, £7m, and, six years ago, £50m. Last year, he withdrew from an initial public offering that would have valued CMC at some £800m. Goldman’s stake suggests the company is worth up to £1.4bn and gives Mr Cruddas the wherewithal to expand CMC more quickly outside the UK, with the US bank as a powerful and well-connected ally.

The entrepreneur stays in control – Goldman wanted a higher stake but had to settle for a 10th – and the incentive for CMC’s top people to stay, or for others to join, increases. Staff own some 5 per cent of CMC. The stake sale defers any IPO to 2009 at the earliest. But with the Goldman’s stamp of approval to certify that CMC is no turkey, employees would expect it to fetch an even richer price by then.

Prudence rampant

Nationwide’s executives did their best on Thursday to keep an I-told-you-so tone out of their voices, but it was hard. The building society is the sort of conservative, self-funding institution that indignant observers of the Northern Rock débacle think should line high streets up and down the land. In the half-year to end-September, Nationwide even managed to take in enough money from savers to fund all its residential mortgage lending. After customers queued to withdraw their savings from the Rock, it seems they queued again to deposit them with Nationwide.

In the real world, as Nationwide acknowledges, a measure of risk-taking and balance sheet efficiency is essential. The group sources 30 per cent of its funds from wholesale markets. It has even had to write down a modest sum invested in the dreaded special investment vehicles (SIVs).

The danger is that some less well-endowed building societies will have been tempted – or encouraged by their boards or advisers – into even riskier waters by the success of the Rock’s originate-and-distribute model and the pressure of competition on mortgage and savings rates. They may be forced to consolidate, or sell themselves to larger institutions. Moderation in all things, as the local building society manager used to say.

Initial Pyrrhic offering

The National Audit Office offers little comfort to those retail investors who argued last year they should be allowed to participate directly in Qinetiq’s initial public offering. Its report says the government could have avoided adverse publicity if it had pointed out earlier that they could buy shares in the defence technology group through their broker. If that is a victory for retail shareholders, it is Pyrrhic: most of the improvement in Qinetiq’s value accrued to the taxpayer, Carlyle (and the group’s management) before the IPO and the shares have rarely traded above the offer price.

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