Water firms see shares spurt over rumours of £1.7bn takeover bid

Shares in water firms raced higher yesterday amid speculation over a potential £1.7bn bid for Northumbrian Water.

Reports of a planned takeover approach from its biggest shareholder, Ontario Teachers' Pension Fund, sent Northumbrian as much as 10 per cent higher.

Fellow listed water groups also benefited from the speculation, with FTSE 250 firm Pennon Group, owner of South West Water, ahead by five per cent and Severn Trent the day's leading FTSE 100 riser with a four per cent rise.

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Northumbrian, which supplies water to parts of North Yorkshire, declined to comment on the bid reports.

The Ontario Teachers' Pension Plan (OTPP) already holds a 27 per cent stake in Northumbrian Water, having snapped up a 25 per cent stake from France's Suez in April 2005.

The group is thought to have long wanted to take it private and was reportedly spurred on to make an offer following Ofwat's decision on final pricing and spending limits for water companies until 2015 in November.

It is understood to have been holding talks with banks to put together the funding for the bid, as well having discussions with other funds, including Canadian investment group Borealis, about being partners in the deal.

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Northumbrian Water provides 2.6 million people in the North East with water and sewerage services, and a further 1.7 million in the South East, where it provides water services trading as Essex & Suffolk Water.

Weekend press reports suggested OTPP would have to make an offer at least 325p a share – 25 per cent above Friday's closing share price of 258.6p – in order to win shareholder backing for the deal.

But the fund, which controls assets worth around 54bn, is seen as being unlikely to offer a large premium, as its existing stake in the group is likely to deter counter bids.

Evolution Securities analyst Lakis Athanasiou said Northumbrian Water is challenged with "special circumstances", including a concentrated share holding, as the top three holders have nearly 50 per cent between them. However, the group has pledged to increase its payouts to investors despite Ofwat's less generous pricing determination, while rivals United Utilities and Severn Trent were both forced to cut their dividends in response to the new limits.

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Northumbrian Water, which was among the first to accept the ruling, recently reported a 13 per cent rise in interim pre-tax profits to 87m due to much lower interest payments on its 2.3bn debt pile.

This came despite a 1.7m bad debt bill in the six months to September after the group was hit by rising business failures in the North East.

Northumbrian Water said in a trading update that full-year revenues were expected to be "broadly the same" as in the previous year.

Charges for households increased by three per cent, in line with inflation, but revenues from recession-battered businesses have continued to come under pressure.

Northumbrian, who recently named Northern Rail managing director Heidi Mottram as its new chief executive, said a review should cut costs by 3m a year.

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