Investors Swallowing Up Shares of Britain’s Privatized Water Industry

LONDON —  Like nomads at a desert oasis, investors here and abroad are gulping shares of Britain’s newly privatized water industry, lifting prices to unexpected highs but raising fears of foreign control over a necessity of life.

The government sold 10 water utilities in England and Wales for $8.4 billion earlier this month. It was the latest in a series of privatizations and surprisingly successful in an otherwise sluggish stock market.

The government offered 2.183 million shares at the equivalent of $3.84 each. The shares, which began trading Dec. 12, quickly rose in price and by Friday were up about 50% on the London Stock Exchange.

“They have done fairly well,” said Stephen Doe, a water industry analyst at the London investment firm Smith New Court PLC.

British investors weren’t the only ones to perceive the water industry as an opportunity. Foreigners, including a French water company, also were aggressive buyers of the stock.

Within less than a week of the trading launch, the French group Lyonnaise des Eaux announced it acquired stakes in three water companies--9% in Anglian Water, 6% in Wessex Water and 2% of Severn Trent.

France’s two other big water companies, Generale des Eaux and Societe d’Amenagement Urbain et Rural, are also expected to be big buyers of the British shares.

There’s no immediate takeover threat to the big water utilities because the government retained “golden shares” limiting holdings in them to 15% for five years.

However, Trade Secretary Nicholas Ridley recently has expressed reservations about this limitation, suggesting it might be lifted.

The French water companies are keen to invest because they believe the British water companies are undervalued and offer good prospects for earnings growth, analysts said.

The French companies have the expertise and technology to capitalize on the opportunities, which aren’t available in other European countries where the water industries are mostly state-controlled.

But some Britons oppose foreign control of their sources of water, particularly if the owners are French, a historic British rival.

The resentment has been suggested in Britain’s financial press, which has quoted critics of the water privatization as portraying the French water companies as raiding opportunists.

But the Times of London wrote in an editorial: “While the government might have preferred to see British rather than French predators, it can hardly object when it is committed to a level playing field in the takeover game in Europe. We are all good Europeans now.”

The water shares are popular with other investors for other reasons. They are considered recession-proof because water is a vital commodity. Built-in price increases in the form of rate hikes virtually guarantee good profits for at least the next few years.

Nigel Hawkins, water industry analyst for Security Pacific-Hoare Govett Ltd., said the water shares’ average yield is attractive at 7%, a 50% premium on the average market yield.

The shares have been boosted by speculation about the French companies’ buying intentions.

There had been concerns that the water sale would fail because it followed the sharp drop in world stock markets a few months ago. But demand for the shares greatly exceeded the supply.

“We have proved our critics wrong,” Environment Minister Michael Howard said.

The water sale is the first privatization since the government’s divestment of its one-third stake in British Petroleum Co. PLC, which was a failure because it coincided with the October, 1987, stock market crash. Many brokers suffered severe losses from the BP fiasco.

The water privatization also faced stiff opposition from critics who believed such a vital utility should remain in state hands for reasons of security and water quality.

Prime Minister Margaret Thatcher’s critics said she was becoming too extreme during her third term, taking a privatization program too far. But she is proceeding.

The government also plans to sell the country’s electricity industry by mid-1992. That sale could raise more than $32 billion, dwarfing the other privatizations.

Thatcher’s Conservative government has sold $53 billion worth of state-owned companies in the past decade as part of a broader economic policy of encouraging private enterprise and investment by British citizens.