The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Consolidated Water has pledged to hold an initial public offering (IPO) of shares in its Bahamian subsidiary “subject market conditions”, Tribune Business can reveal.

The undertaking was given in an October 2, 2013, letter sent to Deputy Prime Minister Philip Davis by Consolidated Water’s president and chief executive, Rick McTaggart.

The letter, a copy of which has been obtained by Tribune Business, states: “Further to our meeting on September 27, 2013, at the Ministry of Works and our previous meetings, I reaffirm Consolidated Water (Bahamas) intent to undertake a public offering of its shares to Bahamian investors.

“We have already obtained the approval of our Board of Directors to retain the services of a local investment bank and are prepared to move forward subject market conditions.”

It is unclear what “market conditions” Mr McTaggart is referring to, but many observers will likely feel it alludes to Consolidated Water retaining its contract to operate the Windsor reverse osmosis plant for a further five years.

The company’s bid to retain that contract, which currently generates $7.5 million in annual revenues, is currently under pressure from the Government’s inclination to solicit rival bids via an open public tendering process.

The IPO offer is thus likely to be perceived in some quarters as an inducement to the Government to retain Consolidated Water, given the promise to broaden and deepen Bahamian equity ownership in the firm.

Tribune Business understands that the IPO proposal has been on the table for many months, but Consolidated Water had held off on moving forward until it saw how the Windsor contract situation played out.

The company, which effectively holds a wholesale monopoly on New Providence’s water supply, given that it also owns/operates the Blue Hills reverse osmosis plant, is already listed on the Bahamas International Securities Exchange (BISX).

But that is via derivatives, namely Bahamian Depository Receipts (BDRs), which are linked directly to the price at which Consolidated Water’s stock closes every day on its main market, the New York-based Nasdaq.

This proposed IPO would be separate from that, and involve giving Bahamian institutional and retail investors direct equity participation/ownership in Consolidated Water’s local subsidiary - the entity that owns/operates both Blue Hills and Windsor.

Losing the latter to a rival would thus undermine the value of Consolidated Water’s Bahamian subsidiary and attractiveness to investors in an IPO, as the company’s position with a water wholesale monopoly would likely be extremely attractive.

No details on the proposed IPO plans were contained in Mr McTaggart’s letter to Mr Davis, so it is unclear what percentage of the Bahamian subsidiary’s equity would be offered, and if the Cayman-based parent would retain the majority. Whether it is a true spin-off of the Bahamian subsidiary remains to be seen.

The local investment bank referred to by Mr McTaggart is understood to be RoyalFidelity Merchant Bank & Trust, would act as the IPO’s placement agent and adviser.

Thus the Government will have to balance its objective of broadening Bahamian ownership of the economy, and deepening the capital markets, with the desire of some within its ranks and the Water & Sewerage Corporation to break Consolidated Water’s wholesale monopoly by giving Windsor to a rival bidder.

Mr McTaggart’s letter effectively confirms these details, which were previously revealed by Tribune Business.

Noting that his discussions with Mr Davis indicated that the Government was seeking an extension (temporary, at least) to Consolidated Water’s existing contract at Windsor, Mr McTaggart’s letter confirmed the public tender plans.

“I further understand that the Government wishes that extension period be as short as possible, but long enough to allow the Ministry to prepare, issue, evaluate and award a public tender for the long-term operation of the Windsor plant,” Mr McTaggart said.

“I suggested in our meeting that the extension period should also allow sufficient time for an orderly transition of operational responsibility to the successful tenderer (in the event that it is not Consolidated Water Bahamas).”

A highly-placed source near to the Water & Sewerage Corporation told Tribune Business that the Government had agreed to extend Consolidated Water’s contract until the planned tender exercise was completed, and a choice on Windsor’s future operator made.

“They don’t want a stoppage of water,” the source said. “Water & Sewerage Corporation is not ready to take over that plant, and nor is anyone else. They’re going to tender, and will extend it on a month-to-month basis.”

They added, though, that the original Windsor contract, drawn up between the Government/ Water & Sewerage Corporation and Consolidated Water’s predecessors, favoured the latter when it came to choosing a new operator.

The source said the contract’s terms “make it difficult to get rid of them [Consolidated Water]. They would have recovered their machinery costs, so can bid very low”.

They likened the situation to rival operators trying to enter the market and compete with Cable Bahamas in the cable TV segment, following the 15-year monopoly that the provider enjoyed”.

The source said the Government and Water & Sewerage Corporation were “trying to go out as soon as possible” on the public tender, which was seen as ensuring that bidders responded to the same requirements rather than all offering different specifications - as they had done to-date.

“It’s up for Cabinet, the next meeting of Cabinet,” the source said of the Windsor situation.

Another source, effectively confirming the difficulties rivals will have in supplanting Consolidated Water, said: “My understanding is that it’s got to the point where they [the Government] know tenders coming in are not going to be any good, and they’ve agreed to extend it for another five years with Consolidated.”

Bradley Roberts, the PLP chairman and Water & Sewerage Corporation chairman, declined to comment when contacted by Tribune Business and referred this newspaper to Mr Davis.

The Deputy Prime Minster did not return calls for comment, despite a message being left on his cell phone.