Vivendi Environnement to Buy U.K. Utility for $3 Billion

Vivendi Environnement SA, the world's largest water company, agreed to buy Southern Water Plc in a transaction valuing the utility at 2.05 billion pounds ($3 billion) to lift its share of the U.K. water market to 10 percent.

Vivendi Environnement, majority-owned by Vivendi Universal SA, said in March it was in talks to buy the utility from First Aqua Holdings Ltd., a group of investors including Royal Bank of Scotland Plc. Vivendi will pay about 420 million pounds, said spokeswoman Anne-France Malrieu, without giving details on debt.

The acquisition will allow Vivendi to add sewage-treatment services to existing customers in Europe's second-biggest economy and boosts its share of a water industry it estimates to be worth $9 billion. Southern Water provides wastewater services to about 2 million customers in southeast England.

``Strategically this makes sense for Vivendi as it allows them to provide extra services,'' said Andrew Whalley, who owns Vivendi Environnement shares among the 250 million pounds worth of assets he helps manage at LeggMason Investors in London. ``My only concern is it seems a pretty full price they're paying.''

Vivendi Environnement's shares were little changed at 36.6 euros. They've fallen about 2 percent this year, making them the ninth-worst performer of the 31 companies in the Dow Jones Europe Stoxx Utility index. Vivendi Universal, which owns 63 percent of its utility unit, fell as much as 6 percent.

Vivendi Universal sold shares in Vivendi Environnement, its water, waste and energy business, in 2000 as part of Chief Executive Jean-Marie Messier's plan to build a media company to rival AOL Time Warner Inc. Messier last month backtracked on an earlier statement he would cut the stake further amid pressure from investors to keep the utility for its steady earnings.

U.K. water utilities, struggling with regulator-mandated price cuts, have become takeover targets for foreign companies and financial investors who want their cash flow to back bond sales. RWE AG of Germany bought Thames Water Plc for $9.8 billion in 2000. YTL Corp. of Malaysia agreed to pay $1.77 billion for Wessex Water, Enron Corp.'s U.K. utility, in March.

First Aqua agreed to buy Southern Water from ScottishPower Plc, a U.K. electricity company, in March and completed the acquisition on April 23. ScottishPower, seeking a fast sale, was concerned a direct sale to Vivendi would involve months of regulatory scrutiny.

Vivendi owns three U.K. water companies already and therefore faces automatic referral to the U.K. Competition Commission. The transfer of control to Vivendi depends on it being approved by U.K. and European Union regulators and on refinancing First Aqua's long-term debt.

While the purchase faces referral to the Competition Commission under U.K. law, ``in principle we believe the merger should not affect our ability to regulate the industry in the long term,'' said Barry Phillips, a spokesman for the U.K. water regulator, Ofwat.

Vivendi can add Southern's wastewater treatment and recycling services to those it offers its customers. It already owns Folkestone & Dover Water Services Ltd., Tendring Hundred Water Services Ltd. and Three Valleys Water Plc in the U.K. None of these presently provide sewerage services, Ofwat said.

``Southern Water is expected to provide for the development of Vivendi's industrial outsourcing activities in the U.K.,'' said Barclays Capital credit analyst Neil Beddall. ``The acquisition will create a fully-integrated water management operation there.''

Vivendi Environnement said the purchase will boost earnings per share from the first year after its completion. On Friday, Moody's Investors Service said it may cut Vivendi Environnement's ``A3'' debt rating, depending on the ``financial flexibility of Vivendi Environnement in the medium term.''

``The transaction represents a major step in the putting in place of an integrated water-management business in the U.K. by Vivendi Water,'' the company said in a statement.


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