British-backed bid kicked out of £11bn National Grid gas auction

The prospect of a foreign takeover of the UK's biggest gas distribution network increased on Friday after the main British-backed offer was kicked out of the auction after being trumped by rivals.

Sky News has learnt that a consortium including sovereign wealth funds from Abu Dhabi and Kuwait, as well as pension funds from the UK and Canada, was told this week that it had failed to make it through to the next phase of the £11bn sale process.

The development is significant because at least three other offers for the National Grid (LSE: NG.L - news) network are dominated by Chinese and other overseas bidders.

The auction comes as Theresa May, the Prime Minister, wants to introduce new tests for foreign ownership of British infrastructure assets.

A deal to give the go-ahead to the Hinkley Point nuclear power station in Somerset was sanctioned by Downing Street only after safeguards were included relating to future changes of ownership.

Other deals relating to critical national infrastructure would be subject to closer scrutiny, the Business Secretary, Greg Clark, said this month.

Most of the UK's other major gas distribution pipelines are already owned by international investors.

The auction of National Grid's gas distribution business is expected to value it at about £11bn including debt.

Banking sources said on Friday that the consortium including Hermes and the Universities Superannuation Scheme, two British pension funds, had been "blown out of the water" by its overseas competitors.

The other bidders include Fosun, a Chinese conglomerate; China Resources Gas, which has teamed up with partners from Australia and Singapore; and Macquarie, the Australian financial services group which is also embroiled in a battle to take control of the Government's Green Investment Bank.

Li Ka-shing, the Hong Kong-based tycoon who is the UK's biggest inward investor, is also fronting another offer for the business.

National Grid's auction is being handled by bankers at Morgan Stanley (Xetra: 885836 - news) and Robey Warshaw.

The company declined to comment on the progress of the sale on Friday, but has previously said:

"The new owner will have to be approved by regulators and operate under the relevant requirements.

"Networks are subject to strict rules and criteria in terms of security reliability and availability and any buyer will need to prove to Ofgem and government that they can meet these criteria."