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New UK government could open floodgates to infra M&A if details appeal — Dealspeak EMEA

Keir Starmer, leader of the centre-left Labour Party, is ahead of incumbent Conservative Prime Minister (PM) Rishi Sunak by a country mile in the opinion polls in the runup to the UK’s general election on 4 July. Labour’s platform emphasises infrastructure spending.

Although the end of 14 years of Conservative rule is considered by many in financial circles to be a foregone conclusion, dealmakers are waiting to see details, details, details before committing capital to the expected boom in infrastructure deals that is likely to follow a change of government. Deals will probably include full acquisitions of infra assets, as well as minority investments by financial players.

“While the general direction of Labour’s policies is well known, welcomed, and victory is largely priced in, the details of Labour’s infrastructure plans remain fuzzier,” according to Simon Tysoe, a London-based partner at Latham & Watkins.

Many have questions about specific parts of the plan, notably how GB Energy (a proposed publicly owned clean-energy company) will work in practice, says Tysoe. “This suggests that there will probably be a lull in infrastructure activity immediately after the election, at least until the proposed new energy bill takes shape — particularly for any investors who need debt financing,” he adds.

Deals in UK renewable energy boomed in 2023 even without knowing GB Energy’s co-investment stance. There were 12 transactions worth GBP 5.3bn (EUR 6.2bn), according to Mergermarket data. This was just a whisker behind the decade’s record year of 2018, which saw 25 deals worth GBP 5.4bn. The trend has continued into 2024, with three deals worth GBP 717m in the year to date (YTD), the third-highest YTD result in the past decade.

The largest UK renewables deal of the year so far has been the sale of Toucan Energy’s solar portfolio in England, Wales and Northern Ireland to Schroders Greencoat and Tokyo Century for GBP 700m. The deal announcement says this represents the largest operational solar portfolio transacted in the UK to date.

One of the largest deals in the pipeline is the proposed sale of National Grid‘s [LON:NG] renewables and liquified natural gas (LNG) businesses, as reported. These sit within National Grid Ventures, which registered an adjusted operating profit of GBP 469m in 2023/4.

National Grid is raising GBP 7bn in a rights issue and refocusing on networks, as well as plotting disposals. The proceeds of the rights issue and asset sales will be used to fund major investments in the company’s energy network infrastructure.

Dividend traps?

Decarbonisation is only part of the UK infrastructure story. Among the priority infra challenges in Starmer’s inbox after the election is likely to be the fate of Thames Water, a financially troubled utility company owned by Kemble Water. Nationalisation is one potential solution to save Thames Water, and dealmakers will want to see if Starmer’s team can rescue the beleaguered operator without creating dividend traps for private investors.

Deals in the UK water industry tend to show modest volumes, with bumper years something of a rarity, according to Mergermarket data. Recent high-water marks have been 2021, with five deals worth GBP 1.8bn, and 2017, which saw 18 transactions valued at GBP 3.5bn.

In 2023, there were seven deals worth GBP 550m. In comparison, 2024 is off to a flying start, with two deals generating GBP 380m. The largest of these has been Pennon’s [LON:PNN] purchase of Sumisho Osaka Gas Water UK, the holding company of Sutton and East Surrey Water (SES Water).

(Don’t fear) Rachel Reeves

Under five consecutive Conservative PMs, the UK’s ruling party has veered between centre-right moderation and hard-right populism, with a brief excursion into a poorly executed supply-side shock. Austerity has been a constant theme across all Tory administrations since 2010. Most recently, Sunak watered down Net Zero commitments in September 2023.

There is a fundamental need for capital to modernise core infrastructure assets across transport, power and utilities, according to Simon Saitowitz, a partner in Ropes & Gray’s private-equity (PE) transactions group.

“This underlying need, plus increasingly sophisticated consumer demand for new infrastructure technologies in key sectors (such as clean and green fuels), means that there will very likely be a continuing material interest in PE investment in the asset class for the long term no matter who is in power,” he says.

Starmer’s shadow Chancellor, Rachel Reeves, has pledged to reform carried interest – a headline policy that the PE industry will dislike. However, the chance to co-invest in infrastructure alongside the likes of GB Energy would soften the blow considerably, particularly if Labour shows sensitivity to investors as it grapples with Thames Water.