United Utilities Takeover Bid in 2012 Is Seen as Unlikely

United Utilities Group Plc, Britain’s biggest publicly traded water company, is unlikely to receive a takeover bid this year as the U.K. considers changes to the way inflation is calculated, according to analysts.

United Utilities’ stock has gained 6.5 percent and rose six of the past seven trading days amid reports in the U.K. press that speculated about the possibility of a breakup bid. Publications including the Guardian cited potential investors such as the Ontario Teachers’ Pension Plan, Abu Dhabi funds, China Investment Corp. and KKR & Co.

The bid talk for the Warrington-based utility occurred as the U.K. Consumer Prices Advisory Committee in a Sept. 18 statement said it’s examining a gap that emerged between the retail-price index and consumer-price index due to the way each is calculated. The U.K. Statistics Authority will hold consultations starting next month on possible changes.

“RPI is an important driver for revenues and value for water companies,” Ian Mitchell, with JPMorgan specialist sales, said in a Sept. 20 interview. “Proposed changes to how it is calculated could negatively impact them. Any prospective bidder would be better off waiting for the outcome of these changes to make itself known.”

Alex Olvera, an analyst with the Marex Event Driven Team, wrote in a note to clients on Sept. 19 that the profits of United Utilities are “dependent on a clear formula for the calculation of RPI” so any offer for the company likely wouldn’t come until after that process is complete.

Sorted by Year-End

Any modification to the way inflation is calculated in the U.K. should be sorted by the start of next year, Mitchell said.

In the last five years, U.K. water companies including United Utilities, Pennon Group Plc and Severn Trent Plc have seen a 16 percent boost to revenue and 17 percent increase to Regulatory Capital Value on average due to RPI even after accounting for recessionary and deflationary periods, Citigroup Inc. wrote in a research note published Sept. 19.

United Utilities shares were 0.2 percent lower at 725.50 pence at 12:30 p.m. in London, trimming their gain this year to 20 percent. Severn Trent’s stock has also gained 20 percent in 2012 while Pennon has advanced 4 percent over the same period.

United Utilities spokesman Shaun Robinson declined to comment on “City speculation” last week to Bloomberg regarding what the Telegraph called “rehashed takeover” talk.

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