Wessex looks to buy out waste partner

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WESSEX Water may be able to buy the other 50 per cent stake of its UK waste joint venture following the news that its partner's US parent intends to merge with another company.

Wessex has long hankered after the stake owned by Waste Management International, the subsidiary of US company Waste Management Inc that is merging with USA Waste Services Inc to create a company valued at $21.8bn (pounds 13bn).

The joint venture contributed pounds 11.8m to Wessex's pre-tax profits in the first half of the 1998 financial year.

It would provide Wessex with an ideal opportunity to diversify its earnings away from the regulated water and sewerage business, where profit margins are destined to be squeezed when the next regulatory period begins in April 2000.

"My own view is US Waste would probably want out," said Nigel Hawkins, an analyst at Williams de Broe. "The likelihood is Wessex will buy the stake."

The stake could cost Wessex about pounds 175m, according to Gordon Culfeather, an analyst at Greig Middleton. As one of the UK water companies with the lowest level of debt, Wessex can easily afford it. At its first half results it said it had net debt of pounds 116m, giving it a debt-to-equity ratio of under 15 per cent.

Nicholas Hood, Wessex's chairman, reiterated the company's position that it would like to buy the stake "at the right price". He said he was "very interested in meeting the new management".

However, the company has no current proposal to put to USA Waste Services, whose marriage to Waste Management still requires regulatory approval. Mr Hood said he had not yet decided what he planned to say to the company. "We shall meet, and we shall talk." Meanwhile, the joint venture continues to prosper, he said.

As a relatively small water and sewerage company Wessex has shunned expansion overseas as a means of generating unregulated profit. It was thwarted by the regulator from bidding for South West Water, a neighbouring water and sewerage company, which would have offered an opportunity to cut costs through economies of scale.

As one of the most successful UK water companies in making efficiency savings beyond assumptions made by the regulator, Wessex faces a sharper cut in bills than most of its peers from April 2000, as the regulator passes those savings on to customers.