Water shares surge as RWE prepares £4.1bn Thames bid

Thames Water, Britain's biggest water company, is to be swallowed up by the giant German utility RWE in a £4.1bn deal. The takeover, due to be announced early next week, will make Thames the third major UK water company to be acquired by an overseas company. Northumbrian and Wessex are already under foreign ownership.

Thames Water, Britain's biggest water company, is to be swallowed up by the giant German utility RWE in a £4.1bn deal. The takeover, due to be announced early next week, will make Thames the third major UK water company to be acquired by an overseas company. Northumbrian and Wessex are already under foreign ownership.

RWE, Germany's biggest electricity supplier, emerged as the predator after Thames confirmed it was in advanced talks with a mystery suitor that could lead to a recommended £12.15p-a-share cash offer.

Shareholders in the privatised utility saw their stock surge by about 25 per cent yesterday. The shares closed up 223p at £11.38. The news also sent shares in other UK water firms spurting higher as analysts forecast other bids in the pipeline.

"It's very, very positive for the sector." said Simon Hawkins, utilities analyst at UBS Warburg. "It's about time something happened to get the sector set alight. It's cheap and we would expect to see some more of this."

Hopes the deal will kickstart UK water consolidation may, however, prove premature.

The water industry regulator Philip Fletcher said an RWE offer for Thames would not raise any major regulatory issues because the German company owns no other UK water assets. But he stressed that maintaining the 10 major water and sewerage businesses under separate ownership was an important policy plank for the regulatory body Ofwat.

The bid is still likely to boost a sector that has underperformed the stock market by 50 per cent in the past two years.

Thames shares have already outperformed the dull sector by around 10 per cent so far this year. In the year to March 2000 it made a pre-tax profit of £420m, in line with expectations and up from £412m in the previous year. Profits on its non-regulated business surged 47 per cent to £85m.

It has made a number of forays overseas and now supplies 12 million customers outside the UK, the same number as its British customer base. It is the world's third-largest water utility behind the French giants Vivendi and Lyonnaise des Eaux.

Its biggest investment is in a water treatment plant in Turkey and a 20-year concession to supply half of the water for the Indonesia capital Jakarta. Last year it snapped up the US water company E-Town for £574m.

Thames also said that under the deal its shareholders would receive an interim dividend of 20p per share in respect of the current year.

Thames's announcement comes amid consolidation in the industry, following hot on the heels of the drawn-out takeover battle for Welsh utility Hyder. The US-controlled Western Power Distribution finally won Hyder last month, beating off rival bidder Nomura, the Japanese bank.

Analysts said the acquisition would allow RWE to exploit Thames' long experience in a deregulated industry would give it the necessary management skills to exploit new water opportunities within Europe.

One City analyst said: "What RWE brings to the deal is balance sheet strength for Thames. What Thames gives RWE is a skills base, particularly in waste water management and international operations."

RWE is one of Europe's "big six" utilities, with a market value of about 21bn euros (£13bn). A planned merger with VEW will add a further 2.7bn euros and make it Germany's largest electricity producer. Wholesale power prices are weak in Germany, leaving RWE under pressure to find growth elsewhere.