Thames Water lenders plot legal fight with Burnham over nationalisation

The group of investors engaged in a rescue bid for Thames Water are plotting a multibillion pound legal battle with Andy Burnham's new government if it forcibly nationalises Britain's biggest water company.

Sky News can reveal that the London & Valley Water (L&VW) consortium has engaged Pallas Partners - which describes itself as an "elite litigation and disputes firm" - to draw up plans for a legal fight with the government if its offer for the company is rejected.

Pallas Partners has been drafted in to work alongside Akin Gump, the law firm which is advising the consortium on the terms of their restructuring proposals, according to people close to the situation.

L&VW has been formed by a syndicate of fund managers including Apollo Global Management, Elliott Management, Farallon Capital Management and Silver Point Capital, which collectively hold £17bn of Thames Water's £21bn debt pile.

They have been involved in negotiations about a £10bn deal to take control of Thames Water and avert the prospect of it being placed into a special administration regime (SAR), a form of temporary public ownership.

However, Sir Keir Starmer's departure from Downing Street and his replacement next week by Mr Burnham has exacerbated concern within the consortium that the new administration will reject the deal.

Mr Burnham has spoken about his desire to see "public control" of water companies, although he is yet to spell out whether this means nationalising the sector.

In relation to the industry's largest operator specifically, he said last month: "I would say for Thames Water, that [greater public ownership] is what should be done."

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That rhetoric has prompted the L&VW consortium to accelerate their own contingency plans for legal action against the UK government, according to City sources.

One said that Pallas Partners had been brought in to assist with a litigation "strategy", which could include challenging a SAR or outright nationalisation on a variety of different legal grounds.

"They are prepared to litigate for years if necessary," said one banker who has worked with some of the funds involved.

A person close to the consortium said the prospect of litigation was "a last resort" and that it was keen to work with the government on a solvent rescue deal which addressed Whitehall's concerns about the restructuring proposals.

"There is no legal action being taken right now," the person said. "This is purely precautionary."

Under the latest terms submitted to Ofwat, the industry regulator, the funds would inject £3.35bn of new equity alongside a total of £6.25bn of new debt.

It would also entail writing off £9.6bn of Thames Water's existing debt.

The company's annual results, published this week, stoked fresh controversy by revealing that chief executive Chris Weston had seen his total pay increase to £1.16m despite the parlous nature of its finances.

Emma Reynolds, the environment secretary, sparked further doubt about whether the government would accept the proposed rescue deal last month when she wrote to Ofwat to express concern about its terms.

"I am not yet convinced that the Proposal demonstrates sufficient protection for consumers' interests," she wrote.

"I understand that there will be some bill impacts in this price review period and further rises in the next period as a direct result of these regulatory adjustments.

"I am concerned that consumers will ultimately bear an undue cost for these adjustments."

It remains unclear whether Ms Reynolds will retain her cabinet post under Mr Burnham, although members of the L&VW consortium expect the new prime minister to show even greater scepticism towards a deal.

This week, the Ofwat chair, Iain Coucher, wrote to Ms Reynolds to inform her that a fresh proposal was in development: "As you are aware, through Defra-led engagement with the company, consortium and Ofwat, L&VW is working on a revised proposal.

"We will consider any such revised proposal, if requested to do so by the company's board, in accordance with our statutory duties, including to ensure that the interests of customers are adequately protected."

Sources close to the consortium said it was preparing a robust set of further proposals, with reports suggesting that an offering of Thames Water shares to customers was among the ideas being considered.

Under their plans, the creditors would not pay any dividends to shareholders until the 2030s, with a plan to return the company to the public markets in about five years' time.

Ofwat is required to hold a three-month public consultation on a private sector deal, meaning that time is running out for such a process to be launched.

Thames Water repeated a warning this week that it would run out of money by the end of the year, although creditors have stated their intention to continue financing the company into 2027.

A spokesperson for L&VW declined to comment this weekend.

(c) Sky News 2026: Thames Water lenders plot legal fight with Burnham over nationalisation