Some City analysts expect Lyonnaise to pitch the bid at £10 per share, valuing Northumbrian at about £680m. After yesterday's announcement of the bid the company's shares rose by £1.28 to close last night at £8.70. A bid by Lyonnaise would also fall under the European merger regulations which would result in the Commission examining the competition issues.
Lyonnaise des Eaux has bought four water-only companies, now merged into North East Water and Essex and Suffolk Water. Jacques Petry, international water division president, said that Northumbrian would be a unique geographic and commercial fit and would complete the group's foray into the UK water sector.
"If we merge as we say we will, there will be opportunities for savings, economies of scale, and very clearly some of those will be passed on to customers," he said. Lyonnaise, which has worldwide sales of £11bn, would pay for Northumbrian from its reserves and from bank facilities. Northumbrian attacked the move as "unsolicited and unwelcome".
"There is an unacceptable absence of specific terms and it will create business disruption and expose shareholders, customers and employees to a prolonged period of uncertainty," the company said. It added that Northumbrian has had talks in the past with Lyonnaise on the initiative of the French group, with a view to Northumbrian buying certain assets. Northumbrian said: "Nothing has come of these discussions owing to Lyonnaise's unrealistic views on value."
David Cranston, Northumbrian's chief executive, said that he has been interested in building on the existing close relationship with neighbouring North East Water, in areas including billing, laboratory facilities, and technology systems. He added that cooperation could be achieved without any change in ownership.
Mr Cranston said that he is "surprised and frustrated" at the way in which Lyonnaise has approached the bid and at the lack of information available. He has asked the Department of Trade and Industry and the Takeover Panel - believed to have been contacted by Lyonnaise - if they can tell him what the French group has said about the proposed bid.
Ofwat, the industry regulator, said that any takeover makes it harder to compare the water companies for the purposes of setting price controls, but that this is not a reason to block the bid "provided the result is savings to customers". Ofwat is expected to look for substantial saving on customers bills.
The spokeswoman said that a key to regulating the industry is ring fencing the core water and sewage businesses in accounting terms, which is already done by the companies.
The Labour Party said that it is studying the issue and feels there are grounds for an MMC investigation. Jack Cunningham, shadow secretary for trade and industry, said: "The proposed takeover of Northumbrian Water by Lyonnaise des Eaux raises questions of competition policy, consumer protection and public interest in the water industry."
City analysts said that other water companies which may become bid targets include Welsh Water, Wessex Water and Southern Water. Unlike the regional electricity companies, the water companies are cash-negative in general. They also have massive capital investment programmes needed to meet their environmental commitments.
Welsh Water is regarded as attractive because of its unusual financial strength in the sector and Southern is seen as a target for another French group, Compagnie Generale de Eaux.