The investment environment for the global water sector appears promising once again. According to forecasts by Global Water Intelligence (GWI), the global water market is projected to reach a value of $914.9bn by 2023. The rise is attributed to a recovering global economy, high commodity and oil prices, as well as water quality and infrastructure plans in China, Saudi Arabia and Southeast Asia.
It is this optimism that is driving established water utilities, such as UAE based Utico, into expansion mode. The company, which has previously been known for undertaking water and power projects in the Middle East and Africa is now ready to take up bigger engagements in new and even more challenging markets.
Following the non-binding agreement that was announced by Hyflux to the Singapore Stock Exchange on 2nd May 2019, Utico revealed that it had in fact sent a SG$400mn ($292mn) binding agreement to Hyflux to consummate a quick turnaround of the company. The agreement includes interim funding possibility as well as engagement with Public Utilities Board (PUB) and retail investors to strike out a win-win deal.
The deal came to this stage after the last white knight investors, SIM of Indonesia, walked off the transaction without a deal after having spent over six months trying to close out an agreement. Utico believes that the deal will satisfy the stakeholders of both Utico and Hyflux.
Hyflux’s attempt at restructuring S$2.95 billion in total debt - one of the largest such cases in Singapore in recent years - hit the skids on April 4 when it aborted a S$530 million rescue plan with Salim-Medco consortium SM Investments (SMI).
Utico has informed Hyflux that it is “aware of the urgency of the restructuring” and that it intends to invest in the group and help preserve its key entities so that they remain intact and operational
The company cancelled a vote by junior creditors scheduled for the following day on the rescue plan by the Indonesian group. Some observers believe the SMI offer was doomed to fail because the retail perpetual and preference shareholders, who are owed about $900 million, would have been forced to accept deep haircuts.
In a strong sign of bonafide intent, Utico had by press time offered a town hall meeting to Hyflux perpetual bonds and preference shares investors (PNP). PNP had invested a total of S$900m into Hyflux after Hyflux had issued an initial offering of S$500m.
These junior unsecured, unguaranteed securities will get nothing when Hyflux is not performing nor is Hyflux obligated legally to pay them in current conditions. This is compounded further if the company is either sold to funds, to investors seeking overseas assets or goes into judicial management.
“We understand that the investors of Hyflux are the ones who will suffer the most as junior unsecured creditors and their position and support must be resolved first. We want to build relations with them,” says Richard Menezes CEO of Utico.
He says that a white knight investor cannot be an investor that only wants Hyflux and its assets or its businesses. “It is a must that a fair and quick resolution is found for investors in the preference shares and perpetual bonds. Utico wants to be such a White Knight investor,” says Menezes.
“We will discuss and put a solid proposal after we hear them out. It is a fact that these investors are unsecured and/or any redemption or coupon must be a win-win deal.”
Mr. Menezes says that to support the PNP, Utico has also requested Public Utilities Board (PUB) of Singapore by informing Hyflux to grant a delay in the takeover of the Tuasspring desalination plant. This consensual settlement of the situation will build confidence and reputation.
“Furthermore, it will allow for Utico and Hyflux to enter into a transaction which would provide for remedial and rectification action of the plant to PUB’s satisfaction and goodwill. This will build confidence and reputation of Hyflux, which is a company that these investors believed in. This was an asset built with PNP money. We feel PNP money and assets must be secured first since the prospectus stated the use of the funds for it,” says Menezes.
“Tuaspring was a strategic asset of Hyflux and for Singapore too. We are prepared to work with Hyflux to ensure it performs without compromising any security aspects and ensure that this asset provides a return as well with PUB support.”
Late last month, Utico met with Securities and Investors Association Singapore (SIAS) CEO David Gerald and reiterated its commitment to work for a win-win resolution as an ethical investor.
The meeting was attended by Utico’s advisors, White & Case, Emirates NBD Capital (ENBDC) as well as Hyflux advisor, Nicky Tan, Mr. Manoj of Wong & Partners, representatives of Drew & Napier., PWC, and several others.
Utico says it wants a deal that builds goodwill with all stakeholders. Menezes says that that was a requirement of the company’s shareholders and part of Utico’s ethos, further stating that Utico had not caused this situation for PNP and other creditors, and the company was merely working towards investing in Hyflux as a going concern and not as a bankrupt organisation. This can be possible only by retaining the goodwill of all stakeholders, he said.
During the meeting, Utico offered part cash redemption and also a hope for full redemption with a plan and exit option. As part of the overall deal, small investors of up to S$2,000 to 3,000 could get 50% cash redemption along with full redemption opportunity while the rest of the investors could get a similar but staggered and cascade deal.
“In all cases all investors will have an opportunity to get their money back as a plan if they support the deal, adding that this was offered to PNP and not to senior creditors who are taking a haircut, since they took an active business risk with ringside view, whereas PNP investors took a passive blind faith risk,” says Menezes.
He points out that neither coupon nor principal was guaranteed in the offer prospectus and while trading at SGX, and morally there remains some responsibility from Hyflux for the PNP predicament.
Menezes says tha if Utico gets PNP support for the deal, it could consider listing in Singapore as well and put some skin into the game too in that market. Utico brings a lot of goodwill and GCC market potential as a key player in the largest water market in the world today, he adds.
Utico has also met with Public Utilities Board Singapore (PUB) CEO, Mr. N.J. Hee and his team and briefed them about Utico’s intention to acquire Hyflux and to help rebuild Hyflux as a key contributor to Singapore economy in the water sector.
But one would ask, why would Utico, of all renowned water utilities players in Asia, be interested in acquiring Hyflux?
Menezes says that acquiring a stake in Hyflux would rightly fit into the company’s long and short term strategies that are intended to kindle both organic and inorganic growth for the utility. “Our interest in that fits into our strategy and what we want to achieve in the future. Therefore, it will be a good fit for us if the deal materialises,” says Menezes.
“Hyflux by itself needs a water player because it is a water company with broad experience in the market. Its uniqueness and value lies in that. If that is diluted, then I dont think there is value in Hyflux.”
Menezes goes on to add that as part of the company’s expansion strategy, its interests do not end with acquiring Hyflux. “This is not the only company that we have express interest in. At the moment, we have an appetite to acquire. We have also expressed interest in two other companies. So Hyflux is just one of them,” says Menezes.
“At the moment we have made offers to buy three companies and they are well known in the world. For us it doesn’t end with Hyflux. These also include European companies.
Menezes says that the company’s excellent financial health which has been maintained over the past years gives it a low gearing ratio, making it eligible to make sound business plans for the future.
“We have today about Dh2.5bn ($681mn) of assets. As a water company, we have the least debt-to-equity ratio in the world for a large player. That means we are not indebted, which gives a lot that we can do. We have many projects that are ongoing and under development that consist of a mix of debt and equity.
“Our growth in the future will be both organic and inorganic. That means that we will be bidding for new projects as well as acquiring some existing projects. So, the appetite of the company is to be where we can best use our expertise which is unique in the world.”
Utico recently commissioned the largest sustainable trans-Emirate pipeline in the UAE, built at a cost of over $100mn. The pipeline which connects Ras Al Khaimah, Um Al Qwain, Sharjah and Ajman is now operational supplying water to customers including Sharjah Electricity and Water Authority (SEWA) and through its connected network to Federal Electricity & Water Authority (FEWA), Utico said in a statement.
“The pipeline can be used to pump at both ends or connect in between enabling each Emirate to trade water. It also facilitates instant water supply to each Emirate when connected. The investment in the pipeline was only possible due to the firm belief in the future of the UAE as a country of opportunities and in its dynamic visionary leadership,” says Menezes.
He says that it is the first pipeline of this size and design built with complete PE 100 HDPE, making it the most efficient and hence with total lower energy costs.
Utico owns over 76 million gallons per day (MIGD) of desalination capacity including 40 MIGD under construction due for commissioning in 2019/2020, thus making it the first private utility to invest in this capital intensive high technology space and be successful sustainably.
The company has previously announced investments of nearly $326.6bn in new utilities projects across the UAE to meet the growing regional demand for water and power. The projects include a water transmission and storage project between Ras Al Khaimah and Sharjah and a state-of-the-art desalination facility to be set up in Ras Al Khaimah.
Utico is also one of the few water utilities around the world that have divested into power generation, transmission and distribution with a network spanning more than 500 kilometres and a power production capacity of 120MW.
The company is currently investing more $500mn to set up a 270 MW coal power plant with carbon capture in RAK. It will be among the first of its kind in the Middle East, and is aligned with the rapid growth of the emirate of Ras Al Khaimah.
Most recently, Utico has stepped up its investments in renewable energy which it considers the future of the power utilities business. The company already has a portfolio of 50MW of clean energy under construction, which it intends to grow in the next few years.
Recently, Utico announced the world’s first integrated hybrid landfill gas (LFG)-solar project that will also include an agro-product development component to make it a completely green and sustainable industry – in line with the UAE Government’s vision to promote green and sustainable economy.
With an investment outlay of $100mn, the project will generate up to 16 megawatt (MW) power to be supplied to its customers in Ras Al Khaimah.
Utico is also investing more than $300mn in a 40MW solar power facility and desalination plant that will produce 22 million gallons of potable water.
“I think the next 5 years is going to see a lot of water and renewable energy. This is going to be our focus going forwards. The nexus between water and power cannot be ignored, you have to be involved in both,” says Menezes.
“We are the first water company to do a large power plant. There are many power companies that have built water projects, but we are the only water company to emerge as a power player and do generation, transmission, and distribution. This gives us a footing across the energy spectrum but while retaining our position as a water player.”
“Our business model is very flexible and unique compared to that of other developers who are mostly focused on acquiring either IWP or IPP, whereas we are looking at much bigger than that.”
To sustain its future ambitions, Utico has had to broaden its equity base by bringing on board new investors. Early this year, Utico secured a $400mn investment from an Omani government-owned entity amid plans for an initial public offering (IPO) and regional expansion.
The deal is the first overseas investment for Majis Industrial Services, which specialises in industrial water services in the port city of Sohar and has a capacity of 14,000 cubic metre per day for potable water in the sultanate. Emirates NBD Capital acted as financial adviser for the transaction. White & Case and Clyde & Co provided legal advisory services for Utico and Majis respectively.
The company’s current shareholding structure is still being kept a secret, but Menezes says that the Omani investment holds a minority stake. The company had more than three shareholders, all of whom were from the GCC.
In 2017, it was revealed that Bahrain-based investment firm Asma Capital had agreed to buy a “significant minority stake” in Utico’s water business in a deal worth $147mn. The deal, conducted through the IDB Infrastructure Fund II, which is managed by Asma Capital, included equity and project finance.
But going forward and as the company prepares its own IPO, Menezes acknowledges that the tough equity environment in which most utilities operate today will be a major hindrance for new acquisitions since most large players are already over-leveraged.