East Surrey set to accept £453m bid

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The Independent Online

East Surrey Holdings, the water and gas supply business, looks set to succumb to a £453m bid, with City speculation focusing on Terra Firma, the private equity group run by Guy Hands, as the likely buyer.

East Surrey Holdings, the water and gas supply business, looks set to succumb to a £453m bid, with City speculation focusing on Terra Firma, the private equity group run by Guy Hands, as the likely buyer.

Analysts said the bidder would be most interested in East Surrey's Phoenix gas distribution venture in Northern Ireland, rather than its relatively small water utility business in Surrey, serving 270,000 homes.

East Surrey said yesterday it had received an indicative approach, pitched at 535p a share. At that level, when the bid is formally put on the table, East Surrey's board, led by the managing director Philip Holder, is expected to recommend it to shareholders. The company's shares were already trading at an all-time high of 432p before rumours of the bid emerged on Wednesday.

At the end of 2003, East Surrey bought out its partners in the Phoenix business, which laid a household gas network in Northern Ireland. Phoenix is now marketing the completed network to customers who have had to rely on gas in canisters or oil to run their heating systems. Analysts said that given the likely strong take-up of gas there, East Surrey was unusual for a utility in that it offered attractive growth characteristics.

Robert Miller-Bakewell, of Merrill Lynch, said: "The multiple [of the offer] is quite punchy because of the latent value in the Phoenix business."

Although it is making a profit, Phoenix is thought to be three to four years away from its optimum levels of profitability - that future level of earnings was not being fully reflected in the East Surrey share price, analysts said.

East Surrey said: "As this announcement has not been made with the agreement or approval of the potential 'offeror', there can be no certainty that an offer will be made."

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