The giant French utility Vivendi Environnement yesterday admitted defeat in its attempt to take over Southern Water for £2bn.
Vivendi instead announced a deal whereby Southern Water will be acquired by a consortium of banks and institutional investors, with the French company left holding a stake of just under 20 per cent in the business.
The utility giant denied that it would lose money on the deal it started in May last year, saying it was "happy with the risk-reward profile". However, City sources said the French would end up out of pocket.
The move follows the Government's decision to block Vivendi's original takeover bid for Southern Water on competition grounds unless it agreed to dispose of some of its other UK water businesses.
Under the complex transaction announced yesterday, Southern Water will be bought for about £2bn from its current owner, First Aqua, by a new holding company which is 80.1 per cent owned by Royal Bank of Scotland and 19.9 per cent by Vivendi.
The bank in turn intends to sell just over half its stake to institutional investors while Vivendi will have an option to raise its stake to 25 per cent.
RBS was heavily involved in the original purchase of Southern Water from Scottish Power by First Aqua, having put up £1.9bn in debt funding to finance the deal. Other investors in First Aqua included Tom Hunter, the Scottish retail entrepreneur.
Vivendi already owns three other UK water companies, the biggest of which is Three Valleys. One of the solutions the Competition minister, Melanie Johnson, ordered the Office of Fair Trading to examine was whether Vivendi should be made to sell off Three Valleys in return for being allowed to buy Southern Water.
The French company is keen to salvage something from the deal by securing the management contract to operate Southern Water or at least some form of consultancy arrangement.
A Vivendi spokesman said: "We intend to retain a minority stake in what we feel will continue to be one of the best managed water and waste water companies in the UK."
Yesterday's deal is still subject to regulatory clearance, but Southern Water's managing director, Stuart Derwent, believed it would "bring stability" to the utility by maintaining its independence with a "sustainable ownership structure".
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