Severn Trent plans £1.5bn float of waste business

The water company Severn Trent unveiled plans to float off its waste business Biffa yesterday in a move that could value the country's biggest domestic refuse collector at between £1bn and £1.5bn.

Investors reacted positively to the news, sending Severn Trent shares 6 per cent higher on hopes the demerger of Biffa would create more value for shareholders by decoupling it from the more lowly rated regulated water business.

Severn Trent said it aimed to complete the demerger by the end of the year, although the announcement that it is spinning off the business could attract competing bids from other waste companies and private-equity firms. The Biffa demerger excludes its troubled Belgian division, which Severn Trent may dispose of separately.

The decision to split the group stems from a root-and-branch review instigated by its new chief executive, Colin Matthews, who took over in February last year. He came to Severn Trent from Hays, where he presided over the break-up of the former logistics and private mail to recruitment and office services conglomerate.

Severn Trent bought Biffa in 1991 and since then has also acquired UK Waste and Hales, spending some £750m in total on the three deals.

A spokesman said the financial benefits of owning a water supplier and a waste company under one roof had not been as great as first envisaged, amounting to less than £10m a year.

The review, which will also decide the future of Severn Trent's other non-regulated businesses and the water business, is due to be complete by the time of the group's preliminary results announcement in June.

The rise in Severn Trent's shares came as a welcome respite for the company, which is facing a fine running into tens of millions of pounds after being found guilty of deliberately misleading the industry regulator Ofwat.

Last month Ofwat ruled that the company had overcharged customers by £42m by incorrectly calculating levels of income and bad debt and ordered Severn Trent to repay the money. It is also facing a separate Serious Fraud Office inquiry.

Biffa accounts for about 15 per cent of Severn Trent's group profits but more than a third of its revenues. In the financial year just ended, Biffa's profits before interest and tax rose by 10-15 per cent from the £79m achieved in 2004-05.