Blow to Thames Water as preferred bidder pulls out

Thames Water has suffered a major setback in its attempt to secure its future after US private equity giant KKR pulled out of plans to buy the company.

KKR had been selected as the preferred partner to inject £4bn of much-needed cash into the UK's biggest water company.

The setback increases the possibility that the company will collapse into a government-supervised administration.

Thames called the news "disappointing" but said it would proceed to work with other potential investors who submitted earlier expressions of interest.

The company is effectively owned by its lenders and a consortium of them has prepared an alternative plan to raise equity which sources say is ready to go and fully funded.

KKR's withdrawal comes on the same morning that an independent commission released interim findings of a review into how the water industry can be reformed - a review which many saw as potentially supportive in attracting new investment.

Sources close to the situation told the BBC that the politicisation of the water industry was a major disincentive for KKR to pursue a deal.

Thames Water chairman Sir Adrian Montague said that while KKR's withdrawal was "disappointing, we continue to believe that a sustainable recapitalisation of the company is in the best interests of all stakeholders and continue to work with our creditors and stakeholders to achieve that goal".

"The company will therefore progress discussions on the senior creditors' plan with Ofwat and other stakeholders."

Thames Water serves about a quarter of the UK's population, mostly across London and parts of southern England, and employs 8,000 people.

The government has previously said it is ready to take over Thames Water in the event that it cannot continue to operate, but earlier this year the company secured a £3bn rescue loan to give it time to restructure.

Regardless of who owns the company, its water services will continue as normal.

When Thames was privatised in 1989, it had no debt. But over the years it borrowed heavily and now has debts of about £19bn.