A flood of cash to buy up the water companies

There's a growing list of potential bidders – but are they tapping into too much risk? Mark Leftly reports

If City analysts are right, Severn Trent chief executive Tony Wray should be celebrating his final annual figures at the helm with a glass of champagne rather than the tap water the listed utility supplies to 3.7m homes and businesses. Scribblers at Société Générale have forecast another bumper year, with revenue up to £1.84bn and a pre-tax and interest profit of £501m – a margin that is, once again, well over 25 per cent.

But Thursday's results will be drowned out by chatter over one issue: the approach to buy out Severn Trent for £5.3bn, which the board rejected earlier this month as substantially undervaluing the utility. A consortium of the Kuwait Investment Office, Canada's Borealis and British pension fund the Universities Superannuation Scheme (USS) has been set a deadline of 11 June to come back with another offer.

With the biggest listed water company, United Utilities, constantly named as a takeover target – to the extent that it recently bumped up its advisory team by drafting in Goldman Sachs – the water industry is simmering with interest. What has some investors wondering, though, is why this is the time that the sector is coming to the boil.

As one City watcher puts it: "These types of consortiums usually don't go in with a final bid straightaway – they're not some sort of chancer private equity group. They usually leave something in the back pocket to come back with. But what's strange is that they've come in ahead of a review: this kind of bid usually happens afterwards."

Water is regulated in five-year cycles. Utilities are currently going through negotiations with Ofwat over what they will be able to charge bill-payers and spend on their pipes and infrastructure for 2015-20.

This means there is a risk Severn Trent will not be able to make as much money as it does in the current price control period. There is a chance that any bidder going for a water company now could find that they pay too much in the light of these changes.

However, the consortium might have thought that it could exploit this uncertainty as it would allow it to argue that what appears to be a slightly stingy offer is therefore justified. The three parties might also be exploiting a chance to pounce on Severn Trent while there is uncertainty over who will replace Wray, pictured.

They might also have calculated that this is a time when a rival bidder is less likely to emerge. British utilities are hugely admired by overseas investors – 12 out of 23 water companies are in foreign hands – as they offer inflation proof, guaranteed returns over a long period of ownership.

Francis Yeoh, managing director at Wessex Water owner YTL, says the way Britain regulates its utilities provides an "incredible environment" for investors. What surprises him is that it took British pension funds until now – in the shapes of USS and the BT scheme's 13 per cent in Thames Water – so long to invest in a sector that will help them generate the safe returns they need to pay the growing legion of retirees.

The sense, then, is that this consortium is willing to risk the regulatory uncertainty for the guarantee of a safe asset that everyone needs and come back with a better bid. Water is always needed; what's different now is that it is also in fashion.

Start your day with The Independent, sign up for daily news emails
PROMOTED VIDEO
ebooks
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
Arts and Entertainment
Under the skin: Sarah Kane in May 1998
theatreThe story behind a new season of Sarah Kane plays
Arts and Entertainment
Preening: Johnny Depp in 'Mortdecai'
filmMortdecai becomes actor's fifth consecutive box office bomb
Sport
Bradford City's reward for their memorable win over Chelsea is a trip to face either Sunderland or Fulham (Getty)
football
News
Lars Andersen took up archery in his mid thirties
video
Voices
Focus E15 Mothers led a protest to highlight the lack of affordable housing in London
voicesLondon’s housing crisis amounts to an abuse of human rights, says Grace Dent
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Client Services Manager - Relationship Management - London

£30000 - £32000 per annum + benefits : Ashdown Group: A highly successful, int...

Recruitment Genius: Credit Controller / Customer Service

£18000 - £20000 per annum: Recruitment Genius: This rapidly expanding business...

Guru Careers: In-House / Internal Recruiter

£25 - 28k + Bonus: Guru Careers: An In-house / Internal Recruiter is needed to...

Recruitment Genius: Tax Assistant

Negotiable: Recruitment Genius: A Tax Assistant is required to join a leading ...

Day In a Page

Woman who was sent to three Nazi death camps describes how she escaped the gas chamber

Auschwitz liberation 70th anniversary

Woman sent to three Nazi death camps describes surviving gas chamber
DSK, Dodo the Pimp, and the Carlton Hotel

The inside track on France's trial of the year

Dominique Strauss-Kahn, Dodo the Pimp, and the Carlton Hotel:
As provocative now as they ever were

Sarah Kane season

Why her plays are as provocative now as when they were written
Murder of Japanese hostage has grim echoes of a killing in Iraq 11 years ago

Murder of Japanese hostage has grim echoes of another killing

Japanese mood was against what was seen as irresponsible trips to a vicious war zone
Syria crisis: Celebrities call on David Cameron to take more refugees as one young mother tells of torture by Assad regime

Celebrities call on David Cameron to take more Syrian refugees

One young mother tells of torture by Assad regime
The enemy within: People who hear voices in their heads are being encouraged to talk back – with promising results

The enemy within

People who hear voices in their heads are being encouraged to talk back
'In Auschwitz you got used to anything'

'In Auschwitz you got used to anything'

Survivors of the Nazi concentration camp remember its horror, 70 years on
Autumn/winter menswear 2015: The uniforms that make up modern life come to the fore

Autumn/winter menswear 2015

The uniforms that make up modern life come to the fore
'I'm gay, and plan to fight military homophobia'

'I'm gay, and plan to fight military homophobia'

Army general planning to come out
Iraq invasion 2003: The bloody warnings six wise men gave to Tony Blair as he prepared to launch poorly planned campaign

What the six wise men told Tony Blair

Months before the invasion of Iraq in 2003, experts sought to warn the PM about his plans. Here, four of them recall that day
25 years of The Independent on Sunday: The stories, the writers and the changes over the last quarter of a century

25 years of The Independent on Sunday

The stories, the writers and the changes over the last quarter of a century
Homeless Veterans appeal: 'Really caring is a dangerous emotion in this kind of work'

Homeless Veterans appeal

As head of The Soldiers' Charity, Martin Rutledge has to temper compassion with realism. He tells Chris Green how his Army career prepared him
Wu-Tang Clan and The Sexual Objects offer fans a chance to own the only copies of their latest albums

Smash hit go under the hammer

It's nice to pick up a new record once in a while, but the purchasers of two latest releases can go a step further - by buying the only copy
Geeks who rocked the world: Documentary looks back at origins of the computer-games industry

The geeks who rocked the world

A new documentary looks back at origins of the computer-games industry
Belle & Sebastian interview: Stuart Murdoch reveals how the band is taking a new direction

Belle & Sebastian is taking a new direction

Twenty years ago, Belle & Sebastian was a fey indie band from Glasgow. It still is – except today, as prime mover Stuart Murdoch admits, it has a global cult following, from Hollywood to South Korea