City looks for water bidders

THE loser in the bid battle for South West Water will turn its sights on an alternative water company target, analysts believe. Southern Water and disaster-torn Yorkshire Water emerged this weekend as the most likely candidates.

Severn Trent's surprise decision to enter the bidding for South West last week in competition to Wessex Water paves the way for a final frenzied bout of takeover activity in the sector ahead of the general election, say analysts.

They point out that there is only a small window of opportunity before an incoming Labour government could slap a windfall tax on water company profits.

Severn Trent is now seeking regulatory clearance to make an offer for South West Water, which is already facing a planned bid from neighbouring Wessex.

A tug-of-war for South West is unlikely to begin in earnest until mid- summer, when the Monopolies and Mergers Commission has completed its examination of the Severn Trent and Wessex proposals.

But the loser in the bid battle will almost certainly train its sights on another target.

"If Severn Trent fails to land South West Water, it is likely to look elsewhere," says Lise Shonfield at broker SBC Warburg. "Bid targets are likely to be those with reasonably strong balance sheets that have avoided going down the multi-utility route. Southern and Yorkshire are the most likely candidates."

Before setting its sights on South West, Severn Trent considered bidding for other water companies at home and overseas and also for other electrical utilities in Britain. Its own franchise overlaps with Midlands Electricity and East Midlands Electricity.

Yorkshire Water, whose shares closed at an all-time high of 688p on Friday, is seen as particularly vulnerable in the wake of the bad publicity it received over its handling of last summer's drought.

One possible suitor could be French utility Generale des Eaux, though it is thought to be cautious about expanding further in the UK.

Another bidder might be Yorkshire Electricity, which analysts note has never ruled out the possibility of making a bid for its water counterpart.

"Water companies have always bought regional electricity companies, but you could argue that RECs are stronger financially," said Nikko's Donna Lury. "And Yorkshire Electricity's management might just be a touch better than Yorkshire Water's, which is seriously ropey."

Buoyed by the bid speculation, shares in Southern Water also closed at a new high of 754p on Friday.

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