Comment: Castle Water’s potential investment in Thames adds up

The FT last week named business water retailer Castle Water as one of the parties interested in taking equity in Thames Water.

Castle and its leadership team have a number of attributes that make this proposition both feasible and potentially desirable for the market: 

• Close operating contact with Thames – Castle bought Thames’ entire non-household customer portfolio in 2017 and has since worked hand in glove with the wholesaler to service this customer base. While the primary function of retailers is to provide billing and customer services, they are also business customers’ first point of contact for all matters, including network and operational issues. Should Castle secure a stake in Thames, it would likely be able to hit the ground running with a strong working knowledge of Thames’ network, processes and systems. 

• Customer focus – As a business retailer, Castle is inherently customer-facing. It boasts a 4.5-star TrustPilot rating compared to Thames’ 1.6-stars, so potentially could lift experience for household customers.  

• Acquisition experience – Castle began as a start up in the Scottish retail market. It has grown rapidly since then to become the English market’s largest independent supplier. While some of this has been through organic growth, Castle has acquired and integrated the customer books of four wholesalers: Thames, South East, Portsmouth and Affinity. 

• Broader relevant experience – between them, Castle’s two directors, John Reynolds and Graham Edwards, have a long track record of executive and investor experience in infrastructure businesses. These include Northern Powergrid, BT and Network Rail. Reynolds was also the founding CEO of Houlihan Lokey’s European business and gained experience there of a bondholder restructuring which – along with his experience of turning around entities with large asset bases – would be highly relevant for Thames. Moreover, many of Edwards’ and Reynolds’ involvements are long-standing, which should address market concerns about investors with short-term interests. 

• Reynolds is a corporate governance specialist. He has written two books on business ethics and chaired the Church of England Ethical Investment Advisory Group for six years. This focus should be well received, given criticism of corporate behaviour by previous Thames owners. The FT report suggested Castle would seek to re-list Thames in a few years’ time, to bolster transparency. 

• Readily available finance.

There is speculation that any acquisition would be carried out by Castle Water’s holding company, and that the directors would seek a controlling stake, to enable them to have operational control and therefore the ability to effect a turnaround and put Thames on a sustainable, long-term footing.

Market expectation is also that there would need to be a compatible debt restructuring package, and acceptable final determination at PR24, for any acquisition to take place.