Pennon, the Devon-based water and sewage business, will today reject a £1bn bid from the high-profile financier Guy Hands, saying it wants to pursue an independent strategy.
The company is also expected to confirm it is in talks to acquire part of its smaller rival, Shanks, for about £200m.
Mr Hands, who has been named as a possible buyer for a string of water businesses in the past few years, approached Pennon through his investment vehicle Terra Firma within the past month.
However, Pennon's management is unwilling to sell. It wants instead to expand its growing waste processing and recycling business through a series of smaller acquisitions.
Ken Harvey, the chairman of Pennon, has embarked on a round of talks with shareholders to garner their support for this approach. So far, shareholders are thought to have backed Mr Harvey.
Pennon, which supplies water to 1.5 million customers in Devon, Cornwall and parts of Dorset and Somerset under the South West Water brand, has spent considerable time trying to expand its waste business, and in April bought Thames Waste Management for £30.5m. It has already been in sporadic talks with Shanks, the listed waste management group, to buy its British business, which is worth more than £150m.
Mr Hands had retained Citigroup to act for him on the offer for Pennon, which has a market value of £880m. Analysts said any bidder would have to offer a premium to Pennon's closing price on Friday of 703.5p, meaning that the take-out price could be closer to £1bn.
In the past few years Mr Hands has been mooted as a potential buyer of several water companies, including AWG, the owner of Anglian Water.
The financier, who used to work for the Japanese bank Nomura, has made an approach to Pennon because he is particularly interested in its expanding waste business, Viridor. The subsidiary operates 21 regional landfill sites, regional recycling facilities and more than 80 waste-processing sites around the UK.
Viridor could be merged with Waste Recycling Group, Britain's biggest waste-disposal company, which was bought by Terra Firma last year for £531m.
Both Pennon and Terra Firma declined to comment yesterday.
Water companies are currently under strain as they await a decision by the regulator over how much they can increase customer bills over the next five years in order to pay for a huge capital spending programme that could exceed £20bn.
Standard & Poor's, the ratings agency, will issue a report tomorrow warning that unless the companies are given enough funding to pay for the improvements that have to be made to meet European and Government guidelines, the credit quality of the sector will be under threat. The companies could also find it more difficult to cope with any future cash flow shocks.
Mr Hands made his name at Nomura by spotting opportunities for investing in sectors which had been neglected by the City. Chief among them were pub estates, which Mr Hands bought up in droves in the late 1990s.
At its peak, Mr Hands' pub empire consisted of more than 5,500 mainly tenanted and leased houses.
The biggest estate was the Unique Pub Company, which was sold in March 2001 for £2bn to a consortium of private equity groups working with Enterprise Inns.