Thames abandons campaign for water mergers

Thames Water has dropped its campaign to be allowed to merge with another water company after clear signals from ministers that the Government wants to see further competition, not consolidation, in the industry.

The company, Britain's biggest water supplier, has instead decided to concentrate on building up its international and non-regulated activities. Thames already generates more of its profits from "non-core" activities than any other UK water company and is expanding aggressively overseas.

Thames bought the American water company E-Town last year and is keen to make further bolt-on acquisitions in the US. It is also pursuing "build and operate" water schemes, including one in the China and another in Thailand.

Bill Alexander, Thames' chief executive, led the campaign for UK water companies to be allowed to merge, personally lobbying the Prime Minister's office. He argued that without mergers, the UK water industry would be less well-equipped to compete in international markets with big overseas water companies such as Vivendi and Enron.

Now, however, Mr Alexander is thought to take the view that a merger with another UK water company would merely double Thames' regulatory risk and prevent it from achieving a stock market rerating.

Another factor is uncertainty over the next water regulator's policy towards mergers. The Government had hoped to announce a successor to Ian Byatt, the head of Ofwat, by Easter but the timing has slipped. Mr Byatt leaves in July.

Robert Miller-Bakewell, the respected utilities analyst at Merrill Lynch, rates Thames as one of his two buy recommendations in the sector alongside Kelda, saying it should be able to deliver dividend growth of 5 per cent or more.