Pennon May See Most Takeover Interest in U.K. Water, Citi Says

Pennon Group Plc is a potential takeover candidate and the most attractive of the U.K.’s three publicly traded water companies due to growth prospects at its Viridor waste-management unit, according to Citigroup Inc.

Severn Trent Plc is now the least likely among peers Pennon and United Utilities Group Plc to receive an offer after thwarting a takeover approach in May from the Kuwait Investment Office, Borealis Infrastructure Management Inc. and Britain’s Universities Superannuation Scheme, saying it undervalued the company.

“A recovery in the waste market, build-out of the Viridor management team and growth offered” by the energy-from-waste pipeline could see greater interest in Pennon, Citi analysts Robert Coates and Andrew Simms wrote in a note to clients today.

Energy-from-waste plants planned by Viridor in Glasgow, London, Peterborough and Wales will make a “significant contribution” to profit growth, Pennon said in its full-year results released May 23. The U.K. has promoted such projects to meet power demand while reducing imports of fossil fuels.

The potential for mergers and acquisitions within the U.K. water sector will drive shares in the near-term, Citi analysts wrote, adding that given the trend in M&A, the U.K.’s publicly traded water industry may not exist in three to five years.

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