Severn stays quiet over £5bn takeover approach

The company, which supplies 7.7 million people in Britain with drinking water, recently rejected an approach from an overseas consortium headed by Canadian infrastructure investment group Borealis, but yesterday gave no clues over a fresh bid.

Underlying pre-tax profits slipped 3.3 per cent to a worse-than-expected £266.3m in the year to the end of March after it hiked investment in its network by 17 per cent to £555m and said commercial customers, such as farmers, used less water during a rainy summer – hitting water consumption by 1.4 per cent.

But price hikes of 5.2 per cent during the year offset falling water use to lift turnover 3.4 per cent to £1.83bn.

Severn’s water services arm, which includes water-purifying and wastewater treatment operations, grew revenues 5.3 per cent to £307.4m, although underlying profits fell 3.5 per cent to £13.9m.

Severn, which was formed in 1974 as a regional, state-owned water authority based in Birmingham, covers an area stretching from the Bristol Channel to the Humber, and from mid-Wales to the East Midlands.

It was privatised in 1989 and takes its name from two of Britain’s largest rivers – the Severn and the Trent.

Coventry-headquartered Severn recently rejected the undisclosed offer from Borealis, the Kuwait Investment Office and Universities Superannuation Scheme as significantly undervaluing the group.

Severn said at the time it “completely fails” to recognise its current and future value, adding that it offered only a “modest premium” to its share price.

But shares in the company have held up as investors expect the consortium to return with a higher bid.

Borealis has until June 11 to announce plans for a firm offer, or walk away.

British water companies are prized by investors such as pension funds, sovereign wealth groups and private equity firms for their monopoly over customers and relatively stable earnings, which are tied to inflation.

Severn, which supplies 4.2 million households and businesses across the Midlands and parts of Wales, hiked its full-year dividend by 8.2 per cent to 75.85p, in line with its inflation-linked target and reiterated its strategy of focusing on operations to deliver attractive returns to shareholders.

It said dividends will grow six per cent in its new financial year.

The company is headed by outgoing chief executive Tony Wray, who will retire from the group next spring.

He became chief executive in October, 2007.

Mr Wray said: “Our focus on continuous improvement has once again delivered a good financial and operational performance.”

The company added: “The group maintains a strong, flexible and sustainable balance sheet, the structure of which is kept under regular review.

“The management team of Severn Trent has a clear and focused strategy – by delivering continuous improvement and higher standards we aim to achieve higher levels of operational excellence and sustainable, attractive returns to shareholders.”

The group plans to invest up to £620m this year in its network.

Severn is the latest British utility to attract interest after buyouts for rivals Yorkshire Water, Northumbrian Water and Thames Water.

Seven of Britain’s 10 water companies are now in the hands of private investors, with Pennon Group, United Utilities and Severn Trent the remaining three listed entities.

The timing of the buyout approach surprised analysts given that regulator Ofwat rules on prices every five years and will next year decide how much bills should rise by between 2015 and 2020.

Some investors have flagged that a bidder could be deterred from making an approach halfway through a cycle, given the uncertainty over the next review.

Borealis already co-owns the UK’s biggest ports operator Associated British Ports and the London to Paris High Speed 1 rail line.

It invests on behalf of thousands of Canadian workers and pensioners in the Ontario Municipal Employees Retirement System.

The Kuwait Investment Authority invests the emirate’s vast oil wealth, while the Universities Superannuation Scheme invests the pensions of UK higher education workers.