Water torture as investors hang on Northumbrian bid
The sector is unlikely to provide an electricity-style bonanza, say cautious analysts
Sunday 08 October 1995
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.
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