A bid, expected to be in the region of pounds 1.3bn, could again ignite the utilities sector, where analysts and investors had been expecting further bid action since the mergers of Swalec and Welsh Water and of NorWeb and North West Water. Shares in Southern Water, which closed Friday at 681p, are expected to soar in trading tomorrow, following the holiday weekend.
ScottishPower, confirming its interest, said a bid would be a step toward creating a multi-utility conglomerate, giving it a water utility to add to its other regulated businesses, which include gas and telecoms.
"We are confirming our interest in Southern and would like to reach agreement with their board," a spokesman for ScottishPower said.
Analysts speculated last night that a US or French utility could also be in the frame. Companies from both countries have been on the acquisition trail in the UK.
An agreed bid was believed to be the most likely outcome, depending on negotiations in coming days. Southern Water is expected to make a formal statement to the Stock Exchange tomorrow.
ScottishPower, which last year paid pounds 1.1bn for Manweb, the regional electricity company, has appointed ING Baring, UBS, James Capel and Scottish firm Noble Grossart. Southern's bankers are Rothschilds and SBC Warburg.
Southern Water, which is capitalised at just over pounds 1bn, last year bought back 10 per cent of its shares, and has one of the industry's strongest balance sheets. According to current fashion in the utility sector, a merger with Scottish would allow the two companies to save millions on centralised costs.
Joint billing systems, metering, information systems, procurement and transport can all generate savings, the company believes. Scottish expects to be able to cut operating costs by as much as pounds 100m by 1998 following its takeover of Manweb.
Similar efficiencies could be achieved through a merger of Scottish and Southern, although insiders caution that the savings would not be as great. Moreover, gearing, now at 52 per cent, would rise further in the event of a successful bid.
The aim is to develop a stronger brand name for Scottish as a utilities provider, irrespective of region. "It's all about price and service," one source said.
ScottishPower owns Caledonian Gas, which supplies 6,000 commercial and industrial customers in the UK. Last year, Scottish spent pounds 18m developing its telecoms subsidiary, Scotti-shTelecom, which is rolling out a fibre- optic network in Central Scotland.
A bid by ScottishPower for Southern is unlikely to be referred to the Monopolies and Mergers Commission, as there are no obvious competitive issues arising from the merger.