Consortium likely to offer about £21 a share after company’s results this week, but some investors said to want £23
Severn Trent is bracing itself for an improved takeover bid worth £5bn after its swift rejection of an approach from a group of UK and international investors.
The water company will report full-year figures on Thursday and is likely to use the occasion as fuel for its argument that the initial offer – believed to be just under £20 a share, or £4.7bn in total – was too low. A meeting with the potential bidders two weeks ago lasted just 30 minutes.
The consortium, which comprises the Canadian group Borealis Infrastructure Management, the Kuwait Investment Office and the UK Universities Superannuation Scheme, is expected to return with an increased offer but this is likely to fall short of the £23 a share that some Severn Trent investors are said to be demanding.
Emphasising its view that the company’s fair value debt level is around £4.8bn, the consortium is likely to pitch its new bid at about £21 a share. Severn Trent closed on Friday at £20.71, suggesting the market expects a new offer but not at a substantial premium to the previous terms.
It is possible the bidders will unveil a new offer before Severn Trent’s figures, but more likely that they will wait until after the results have been announced. The deadline for a decision is 11 June. The bidders may decide to approach the company’s shareholders directly, but are unlikely to make a hostile move if the board rejects any upgraded bid.
Tina Cook, an analyst at Charles Stanley, said: “The share price level suggests that investors believe the consortium will return with an enriched offer before the deadline and not be deterred by the next regulatory price review (but this cannot be guaranteed).”
While some investors reportedly believe £23 would reflect the scarcity value of the assets on offer – there are now only three listed UK water companies after a spate of acquisitions – the consortium points out there may also be a scarcity of buyers prepared to fund a bid of almost £10bn including debt. The regulator Ofwat recently warned of the dangers to the water sector of bidders running up huge borrowings to fund takeovers.
Utilities have been in demand for their steady cash flows and stable regulatory environment. But in common with the rest of the water sector, Severn Trent is three years into its latest five-year regulatory period, and the controls on the prices it charges to its 4.2 million household and business customers beyond then are yet to be determined.
When the bid was revealed this month, Cook said: “The timing of the potential deal is somewhat surprising in that it comes just ahead of the UK water sector’s next regulatory price review 2015-20, which is currently under way and due to be finalised next year. This inevitably creates some mid-term risk across the sector.”
The company is expected to report a 1% rise in full-year profits to around £279m, with the benefits of regulatory price rises tempered by lower commercial volumes and higher costs.
If a deal is agreed it will mark the swansong of the Severn Trent chief executive, Tony Wray, who is due to retire next spring. It would also mark an end to public life for a company formed in 1974 as a regional, publicly owned water authority based in Birmingham and providing services around two of Britain’s largest rivers, the Severn and the Trent.
Along with nine other regional businesses, it was privatised in 1989. Since then only Severn, United Utilities and Pennon have remained independent.
Separately, reports over the weekend suggested that a 30% stake in Kelda, the owner of Yorkshire Water, could be up for sale for between £1bn and £1.5bn.
Kelda is currently owned by a group of investors including Citigroup, HSBC, the Singapore sovereign wealth fund GIC and Infracapital Partners. According to the Sunday Times, a number of international businesses such as the Abu Dhabi sovereign wealth fund and Goldman Sachs are considering offers for the stake.