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EDF Deal May Mean ‘Upside’ for British Water Stocks

Aug. 2 (Bloomberg) -- United Utilities Group Plc and the stock of rival U.K. water companies may benefit from speculation of acquisitions after Electricite de France SA’s agreement to sell its U.K. power grid, Credit Suisse Group AG said.

“The deal highlights that infrastructure funds continue to see significant value in U.K. regulated businesses,” Credit Suisse analysts Robert Chantry and Mark Freshney said in a July 30 note to investors.

A group led by Cheung Kong Infrastructure Holdings Ltd. offered 5.8 billion pounds ($9.1 billion) for EDF’s U.K. power network last week. The distribution grid serves about 7.8 million people in London and southeast England.

The agreement represents a premium of 18 percent to 25 percent over the so-called regulated asset base and there would be a “significant upside” for U.K. water companies at a similar valuation, the analysts said.

An 18 percent premium over the 2011 regulated asset base would suggest a 30 percent gain in the share price of United Utilities and a 24 percent rise for Severn Trent Plc, Credit Suisse said. Other water companies that may gain include Pennon Group Plc and Northumbrian Water Group Plc.

United Utilities rose 4 percent on July 30 when the EDF agreement was announced. It gained 0.9 percent to close at 590.5 pence in London. Severn Trent climbed 2.6 percent to 1,344 pence. The Bloomberg Europe Water index has risen 5 percent this year to 108.94.

“We think fundamental upside looks more limited at these levels given the tough conditions the recent review imposed on the stocks,” the analysts said, citing flat prices over the next five years. “It’s the M&A potential that is supporting some of the stock prices at these levels.”

To contact the reporter on this story: Kari Lundgren in London at klundgren2@bloomberg.net

To contact the editor responsible for this story: Will Kennedy at wkennedy3@bloomberg.net

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