The potential for mergers and acquisitions within the U.K. water industry still exists even amid a regulatory price review as the low cost of debt among the companies is attractive, according to JPMorgan Chase & Co.
“Further M&A in the sector cannot be discounted,” JPMorgan analysts Edmund Reid and Chris Gallagher wrote in a note to clients yesterday. “The recent Borealis approach for Severn Trent (SVT) shows that infrastructure funds are willing to look through the regulatory review.”
LongRiver Partners, a group led by Canada’s Borealis Infrastructure Management Inc., abandoned its 5.3 billion-pound ($8.2 billion) bid for Coventry-based Severn Trent in June. Under local rules, bidders can’t return with a new approach for six months. Severn Trent is the second-largest publicly traded U.K. water company, trailing United Utilities Group Plc. (UU/)
The shares of Pennon Group Plc (PNN), the U.K.’s third-largest publicly traded water company, rose as much as 1.9 percent in London today after JPMorgan raised its rating on the stock to overweight from neutral.
The analysts cited Pennon’s lack of exposure to the review that U.K. regulator Ofwat is conducting to set prices water companies can charge from 2015 through 2020. Ofwat’s final determinations are due to be published in December 2014.
In upgrading Pennon, the analysts noted its “sizeable waste business Viridor, which means it has less exposure to the review than its peers.”
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