Southern Water sold by RBS for £4.2bn

Southern Water, which provides water and sewage services for Kent, Sussex and the Isle of Wight, has changed hands once again.

A consortium led by JP Morgan's infrastructure investment arm emerged as the winner of the intense auction with a £4.2bn bid for the company, beating rival groups led by Goldman Sachs and Morgan Stanley.

The winning group, called Greensand, included Challenger Infrastructure Fund and Access Capital Advisers, both of Australia, and UBS. The consortium paid slightly more than first anticipated by Royal Bank of Scotland, which put the business up for sale earlier this year. The headline price can be broken down into about £1.3bn in equity and around £2.8bn in debt.

RBS bought the business with its partner Veolia for £2.05bn in 2003 from ScottishPower. The healthy price paid is just the latest manifestation of the City's infatuation with water utilities. Shares in the publicly traded water groups Pennon, Severn Trent and Kelda were all up strongly yesterday amid investor expectations that more deals could be in the offing. The Australian bank Macquarie, which paid £8bn for Thames Water last year, advised the winning consortium on its bid.

City financiers are enamoured of water companies because they have captive client bases that cannot switch to other providers even if they are displeased. Returns are regulated under five-year agreements determined by Ofwat, the water regulator, so they provide the most reliable of returns. These companies are also endowed with large networks of physical assets against which large amounts of debt can be raised.

Under the current scheme, which runs until 2010, Southern Water has the highest forecast growth in regulatory capital value of any company in the sector, with 31 per cent. Some sector bankers have questioned the increasingly high prices being paid for water companies, given that Ofwat is in the midst of carrying out its next price review. The regulator has recently slapped major fines on companies for failing to patch leaky networks and could decrease the allowed returns. A significant reduction in returns could materially alter the multiples at which businesses are now valued.

Southern Water provides water services to 2.3 million customers, and waste services to nearly twice that number. Projected population growth in the South-east is expected to be a major driver of future growth.