Guy Hands, who runs the buyout fund Terra Firma, has walked away from Pennon, the water and waste group he recently tried to buy for £1bn.
Pennon, which owns South West Water and the UK's second-largest waste business, Viridor, announced last week that it is in separate talks to buy the landfill sites from waste services company Shanks for around £200m.
It is understood that the two sides are only days away from agreeing a deal. One source said: "It is all they are concentrating on." A deal could be announced as early as this week when the companies report preliminary results.
Completion of the deal would mark a major setback for Mr Hands. He wants to combine Viridor with the UK's largest waste company, Waste Recycling Group, which he bought last year for £531m in Terra Firma's only deal to date. If Shanks sells its landfill sites to Pennon, Mr Hands would face competition difficulties in trying to buy the enlarged group.
He will make another approach to Pennon only if the deal with Shanks breaks down. He will not launch a hostile bid.
Pennon announced last week that it had rejected Mr Hands' takeover - thought to value the group at £1bn, or a 14 per cent premium to its share price - because it did not reflect the value of the group's assets.
Mr Hands set up Terra Firma, which has €2bn (£1.35bn) of funds, in 2002 when he left the Japanese bank Nomura, whose private equity division he ran.
It is understood that Terra Firma is turning its attention to the Continent for a major acquisition. In the UK, it will look for smaller "bolt-on" private landfill sites to expand Waste Recycling Group.
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