South Wales Electricity is today expecting a new and higher offer from Welsh Water of more than pounds 9 a share, valuing the electricity distributor at over pounds 900m.
Andrew Walker, chief executive of Swalec, said Welsh Water now realised that to secure a recommended offer any bid would have to be "well north of pounds 9".
His statement followed Swalec's rejection yesterday of an outline offer of between 825p and 840p a share as "totally unacceptable". Swalec's shares began the day at 856p and finished at 861p.
After a day in which executives of the two companies and their advisers were closeted in the London offices of Rothschild, Swalec's merchant bank, the two sides agreed to meet again this afternoon.
Swalec said Welsh Water had stated that before making any formal offer it wanted to see the contents of a speech by Ian Lang, President of the Board of Trade, this afternoon on utility regulation.
This followed rumours in Westminster that Mr Lang was about to clamp down on the utilities. But the Department of Trade and Industry said Mr Lang was not planning to announce any changes in regulation.
Mr Walker said the indicative offer tabled yesterday would be firmly rejected by his board because of its complete failure to reflect shareholder value. But on the understanding that Welsh Water was willing to consider a significantly higher offer, Swalec would provide detailed information that would "clearly demonstrate that Swalec is worth substantially more than Welsh Water's inadequate proposal".
This proposal was refused after a half-hour meeting between the senior management of the two sides.
But Welsh Water's senior management, led by Ian Evans, the chairman, appeared to have a change of heart after spending three hours with its advisers in another room at Rothschild.
According to Mr Walker, Welsh Water's advisers then said their clients were prepared to offer a better price than the one suggested in the morning. On this basis, the two sidesagreed to meet again this afternoon, after the presentation of Swalec's interim results.
Mr Walker said the original proposal, which he had turned down, was at a substantial discount to the market price of Swalec, and included a full cash alternative at an unspecified discount to the offer level.
But Welsh Water did indicate that it was prepared to pay more in return for a recommendation from the Swalec board, subject to financing arrangements.
The offers being discussed exclude the value of Swalec's stake in National Grid, which is being floated on the stock market next month, with the value passed on to Swalec shareholders.