Ofwat, the water industry regulator, today starts negotiations over the proposed bid for Northumbrian Water by Lyonnaise des Eaux of France.
In meetings this week with the companies, the watchdog is expected to hold out for price cuts of up to 20 per cent as a condition for the takeover, in spite of warnings by Lyonnaise that it may abandon its plans if the terms are too onerous.
Ian Byatt, director general of Ofwat, has been asked by the Government to decide conditions for the bid after a ruling by the Monopolies and Mergers Commission that it would be against the public interest. Mr Byatt favours price cuts of 15 to 20 per cent for customers over the next four years.
Ofwat said yesterday: "He has set out his stall. That's what he aims to achieve and he usually sticks to his guns."
Jacques Petry, president of the international water division of Lyonnaise des Eaux, has said: "Clearly, there is a gap between our position and that of Mr Byatt. We need to discuss it thoroughly but if the expectations are too high, the deal will not go through and that would be to the detriment of customers." The company will have its first meeting with Mr Byatt tomorrow, following today's session between the regulator and Northumbrian.
Lyonnaise has refused to put a price on its bid plan announced in February. Northumbrian shares fell 20p on Monday to 908p and by a further 3p yesterday on speculation that the French group would walk away. Some City analysts believe that Lyonnaise may bid only pounds 9 a share because of the pricing conditions. That would value Northumbrian at about pounds 600m.