RWE, the German owner of Thames Water, has told Macquarie that to prevent competition concerns hampering its bid for Thames Water, it needs to transfer ownership of its existing water company.
Macquarie is lining up other banks which could temporarily take ownership of South East Water. These are unlikely to include serial investors in the water sector, such as Royal Bank of Scotland, which already owns a controlling stake in Southern Water, and so would face competition concerns itself if it tried to buy South East Water.
The Office of Fair Trading refers any UK water company merger to the Competition Commission if the combined companies' turnover is more than £20m. The Commission can take up to six months to adjudicate on a deal.
RWE said last month that its preferred option for disposing of Thames Water was a flotation. But the company, which is being advised by Goldman Sachs, has also appointed Deutsche Bank to run a separate sale for the company. RWE expects final round bids in by the end of next month.
As well as Macquarie, called the millionaires factory, at least two other consortia are preparing bids: Guy Hands's buyout firm, Terra Firma, has teamed up with Citigroup, and Hong Kong-based infrastructure fund CKI. Kohlberg Kravis Roberts, UBS and Ontario Teachers Pension Funds are also understood to be considering joining other consortia to make bids.
Of the likely bidders, Macquarie, led by Allan Moss, is the only company to already own a large water company, putting it at a big disadvantage unless it sells South East Water first.
CKI already owns Cambridge Water, but with a turnover of £15m, any competition issues would be much easier to resolve.
Bankers said that Macquarie would "warehouse" South East Water by agreeing to a cheap sale with another bank or financial buyer before it bid for Thames Water.
If Macquarie's bid for Thames Water is successful, South East Water would be sold on by the new owner, which would keep the profit.
If Macquarie is not successful, it would buy back South East Water, probably at a higher price. Macquarie, which owns 75 per cent of South East Water, bought the company in 2003.
A Macquarie spokeswoman declined to comment.