Severn Trent bid stirs up water sector

Takeover speculation in the water sector reached fever pitch yesterday when Severn Trent joined battle for control of South West Water, which already faces a potential bid from Wessex Water, writes Mary Fagan. The move shocked the City as it heralds the first fight between two of the 10 main water and sewage companies for the same target.

Shares in South West Water soared by 44p to 659p in spite of the fact that no price has been named by either predator. Both potential bids will have to be examined by the Monopolies and Mergers Commission and Severn Trent and Wessex will await the outcome before making any formal offer.

City analysts said that the takeover price could go to 700p, which would value South West Water at almost pounds 900m. There was general surprise at Severn Trent's willingness to become involved in a bid battle when four other companies including Yorkshire Water and Thames Water - both of which are undergoing management changes - are yet to become subject to bids. One analyst said: "This is just silly. Now we will get away from a reasonable price for South West and into what people are prepared to afford."

Vic Cocker, Severn's chief executive, said the offer for South West would be wholly in cash and funded largely through borrowings. He said the company had carried out a thorough review since last April of acquisition opportunities among utility companies and South West was the ideal fit.

Mr Cocker said the deal would be earnings-enhancing from the first year and the numbers were "robust", in spite of the likelihood that the regulator, Ofwat, would require swingeing price cuts if the bid succeeded. Ian Byatt, director-general of Ofwat, exacted a guarantee of a 15 per cent reduction in customers' bills in the recent takeover of Northumbrian Water by Lyonnaise des Eaux of France, and the expectation is that Wessex would be asked to come up with as much as 20 per cent.

Mr Byatt believes that mergers and takeovers hamper his ability to regulate by reducing the number of companies between which he can make comparisons. He demands a price cut to offset the disadvantage and has a reputation for becoming tougher with each bid that occurs.

Mr Cocker said: "We will not be drawn into over-paying. There are other opportunities out there but this one is definitely for us. It is very attractive."

He said he had told South West only on Wednesday that Severn Trent intended to make the announcement and had had a "philosophical" response.

Unlike Wessex, Severn Trent is not adjacent to South West but Mr Cocker said this would not reduce the benefits of the merger in terms of cost- savings and increased efficiency. He said there would inevitably be job losses but refused to comment further.