Water torture as investors hang on Northumbrian bid

The sector is unlikely to provide an electricity-style bonanza, say cautious analysts

INVESTORS pouring into Britain's privatised water sector are eagerly awaiting the Government's decision on a proposed bid by Lyonnaise des Eaux for Northumbrian Water.

Its reaction to the pending bid - for an undisclosed amount - is seen by analysts as the clearest signpost to whether the sector will reward speculators the way the electricity industry has.

Water shares rocketed last week on hopes that the industry would attract a wave of bids. The FT-SE index for water companies rose 69 points on the week to 2,148, led by Southern Water (up 33p to 717p), Yorkshire (up 32p to 657p) and Anglian (up 27p to 596p).

Lazard Brothers, the merchant bank advising Northumbrian, believes Ian Lang, the President of the Board of Trade, could make his ruling on the principle of the Northumbrian takeover before the Conservative conference begins on Tuesday.

Ian Byatt, the industry regulator, has suggested that the reduction of competition should be offset, if the deal goes through, by a 15 to 20 per cent price cut for customers, forcing Northumbrian's future owners to implement cost savings that he would use as a benchmark for other companies. Such a cut could reduce the amount offered to shareholders by up to 80p.

Despite the uncertainty, investors have been flooding into the market. Shares in the sector have out-performed the FT-SE All-Share Index since March. Most of the new players are institutional shareholders who have sold some pounds 11bn in regional electricity company shares to the predators stalking that sector but want to maintain a presence in utilities to keep their portfolios balanced. Others are speculators gambling that water shares will boom the way electricity stocks have.

Most analysts feel the sector will not take off. Unlike electricity, where several large US companies have bid or are waiting in the wings, the international water sector consists of small, fragmented companies, often municipally owned. Only the three French giants are obvious bidders.

Water companies are not cash generative. Heavy capital expenditure is needed to bring services up to European standards of pollution control. This summer's drought brought pressure to bear for them to invest in reducing leaks from their pipelines.

Add the threat of enforced price cuts and the possibility of a future Labour government imposing a windfall tax and the sector looks even less attractive.

But some observers reckon the sector is under-priced by about 10 per cent. The most bullish City analyst, Robert Miller-Bakewell, of NatWest Securities, has predicted that the 10 listed water companies will be reduced to seven by 1997, with one being taken over by a French company, a second merging with an REC, and a third going to a conglomerate. If North West Water is successful in its contested bid for Norweb, and Lyonnaise with Northumbrian, only one more deal would be needed to fulfil his prediction.

Start your day with The Independent, sign up for daily news emails
PROMOTED VIDEO
ebooks
ebooksA special investigation by Andy McSmith
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Software Development Manager

£40000 - £50000 per annum: Recruitment Genius: This is an exciting opportunity...

Ashdown Group: Product Manager - (Product Marketing, Financial Services)

£30000 - £35000 per annum + Benefits: Ashdown Group: Marketing Manager - Marke...

Recruitment Genius: Compliance Assistant

£13000 per annum: Recruitment Genius: This Pension Specialist was established ...

Ashdown Group: Market Research Executive

£23000 - £26000 per annum + Benefits: Ashdown Group: Market Research Executive...

Day In a Page

As in 1942, Germany must show restraint over Greece

As in 1942, Germany must show restraint over Greece

Mussolini tried to warn his ally of the danger of bringing the country to its knees. So should we, says Patrick Cockburn
Britain's widening poverty gap should be causing outrage at the start of the election campaign

The short stroll that should be our walk of shame

Courting the global elite has failed to benefit Britain, as the vast disparity in wealth on display in the capital shows
Homeless Veterans appeal: The rise of the working poor: when having a job cannot prevent poverty

Homeless Veterans appeal

The rise of the working poor: when having a job cannot prevent poverty
Prince Charles the saviour of the nation? A new book highlights concerns about how political he will be when he eventually becomes king

Prince Charles the saviour of the nation?

A new book highlights concerns about how political he will be when he eventually becomes king
How books can defeat Isis: Patrick Cockburn was able to update his agenda-setting 'The Rise of Islamic State' while under attack in Baghdad

How books can defeat Isis

Patrick Cockburn was able to update his agenda-setting 'The Rise of Islamic State' while under attack in Baghdad
Judith Hackitt: The myths of elf 'n' safety

Judith Hackitt: The myths of elf 'n' safety

She may be in charge of minimising our risks of injury, but the chair of the Health and Safety Executive still wants children to be able to hurt themselves
The open loathing between Barack Obama and Benjamin Netanyahu just got worse

The open loathing between Obama and Netanyahu just got worse

The Israeli PM's relationship with the Obama has always been chilly, but going over the President's head on Iran will do him no favours, says Rupert Cornwell
French chefs get 'le huff' as nation slips down global cuisine rankings

French chefs get 'le huff' as nation slips down global cuisine rankings

Fury at British best restaurants survey sees French magazine produce a rival list
Star choreographer Matthew Bourne gives young carers a chance to perform at Sadler's Wells

Young carers to make dance debut

What happened when superstar choreographer Matthew Bourne encouraged 27 teenage carers to think about themselves for once?
Design Council's 70th anniversary: Four of the most intriguing prototypes from Ones to Watch

Design Council's 70th anniversary

Four of the most intriguing prototypes from Ones to Watch
Dame Harriet Walter: The actress on learning what it is to age, plastic surgery, and her unease at being honoured by the establishment

Dame Harriet Walter interview

The actress on learning what it is to age, plastic surgery, and her unease at being honoured by the establishment
Art should not be a slave to the ideas driving it

Art should not be a slave to the ideas driving it

Critics of Tom Stoppard's new play seem to agree that cerebral can never trump character, says DJ Taylor
Bill Granger recipes: Our chef's winter salads will make you feel energised through February

Bill Granger's winter salads

Salads aren't just a bit on the side, says our chef - their crunch, colour and natural goodness are perfect for a midwinter pick-me-up
England vs Wales: Cool head George Ford ready to put out dragon fire

George Ford: Cool head ready to put out dragon fire

No 10’s calmness under pressure will be key for England in Cardiff
Michael Calvin: Time for Old Firm to put aside bigotry and forge new links

Michael Calvin's Last Word

Time for Old Firm to put aside bigotry and forge new links