United Utilities, the country’s biggest listed water company, showed today just why there is so much takeover interest in the sector with an 8.7 per cent jump in pre-tax profit to £304.7 million.
Though rival Pennon Group, which owns South West Water, saw profits slump by nearly £180 million due to problems at its waste division, the water sector is the talk of the City.
This is because of a £5 billion bid for Severn Trent earlier this month from a consortium including British pension fund the Universities Superannuation Scheme.
Although rejected by Severn’s board, the consortium, which also comprises Kuwaiti and Canadian investors, is expected to come back with a higher offer by a Takeover Panel imposed deadline in June.
The certainty of returns from rising water bills is attractive to long-term investors in an age when equities have proved so volatile and bonds low-yielding. The interest of USS in Severn suggests that UK pension funds might have identified another way of matching their assets and liabilities in the consistent revenues of regulated utilities.
United, which provides tap water in the North-West, has long been touted as a potential target and management seems to be taking the market chatter seriously, having hired Goldman Sachs last month to beef up its advisory team. Many observers believe that United drafted in the heavyweight bank so that the utility was better prepared to fight off a bid should it emerge.
Bill increases helped drive United’s revenue up more than 4.5 per cent to nearly £1.64 billion in the year to March. Dividend payout to investors was hiked by a couple of pence to 34.32p per share.
Pennon’s South West Water showed similarly impressive results, as pre-tax profit increased by 7.5 per cent to £152.1 million. However, its Viridor waste business suffered from declines in recycling and landfill work.
Ken Harvey, Pennon’s chairman, said that the group was “continuing to respond aggressively” to Viridor’s difficulties. These responses include “necessitated site rationalisations, headcount reductions and exceptional charges in relation to asset impairments and provisions”.
United’s shares rose 7.5p to 789p, while Pennon dropped 4.5p to 700p.