Kuwait-Led Group in Takeover Approach for U.K. Water Firm

Kuwait’s sovereign wealth fund and a Canadian infrastructure investor are discussing a bid for Severn Trent Plc, the U.K.’s second-largest publicly traded water company that’s valued at almost 5 billion pounds ($7.6 billion).

The Kuwait Investment Office, Borealis Infrastructure Management Inc. and Britain’s Universities Superannuation Scheme approached the utility regarding a possible takeover, Coventry, U.K.-based Severn Trent said today in a statement. Its shares surged 19 percent to a record, and closed 14 percent higher in London trading for its biggest gain in 4 1/2 years.

The announcement pushed up the shares of U.K. utilities including Pennon Group Plc and Britain’s biggest publicly traded water company United Utilities Plc on speculation other bidders may be attracted by the stable, low-risk returns backed by assets that they offer.

“Regulated activities particularly in the U.K. have historically been attractive to infrastructure funds given their stable and inflation-linked cash flows which help these funds typically match their inflation-linked long-term liabilities,” Ashley Thomas, a London-based analyst at Societe Generale SA, said by phone. Severn Trent may be a more manageable deal than its peers, he said.

A takeover would make Severn Trent the latest British utility to come under foreign ownership after buyouts including Yorkshire Water Services Ltd. and South Staffordshire Plc. Thames Water Utilities Ltd, with 14 million customers in the London area, was bought in 2006 by Kemble Water Holdings Ltd., with investors including Australian bank Macquarie Group Ltd.’s European Infrastructure Funds.

Takeover Speculation

Borealis, based in Toronto, co-owns the U.K.’s biggest ports operator Associated British Ports, which owns 21 ports in England, Scotland and Wales. It invests on behalf of Canadian workers and retirees in the Ontario Municipal Employees Retirement System, Canada’s sixth-biggest pension fund manager.

The companies recently made an approach to the board of Severn Trent with a view to making a proposal regarding a possible cash offer, Borealis said today in a statement. “There can be no certainty that any offer will ultimately be made for Severn Trent,” it said in the statement.

The approach may impact Severn Trent’s credit quality if it results in an offer, Moody’s said today in a statement. It was too early to assess a potential rating impact without a firm proposal, the company said.

Takeover Talk

U.K. water companies have been the subject of recent takeover talk. State-owned Abu Dhabi Investment Authority was reported last month by the Daily Mail to be considering a bid for Pennon while the Sunday Times said in April that United Utilities hired Goldman Sachs Group Inc. amid speculation of a possible takeover deal.

The Financial News reported earlier that the Kuwait Investment Authority formed a group to make a 5.3 billion-pound bid for Severn Trent, citing people with knowledge of the matter. That price would represent a premium to the regulated asset base of about 30 percent, in line with historical transactions in the sector, Thomas said.

Ofwat Consultation

British water regulator Ofwat is consulting on the prices water and sewerage companies must deliver for the five years from 2015 to 2020, with final prices to be published next year.

“We do have evidence that funds are prepared to complete deals in U.K. water companies despite the forthcoming review,” Thomas said. “On that basis, the likelihood of the deal closing is probably quite high.”

Liberum Capital Ltd. analyst Peter Atherton said in a note it was “surprising” for a potential bid to be made in the third year of the five-year regulatory period. A bidder would take “considerable regulatory risk” if it pays a 35 percent premium to regulatory capital value at this point, he said.

Severn Trent shares jumped as much as 345 pence to a record 2,170 pence, the highest since first sold in 1991. They closed at 2,077 pence while Pennon rose 4.4 percent and United Utilities gained 2.8 percent.

Severn Trent supplies drinking water to 7.7 million people. Before today it had gained 16 percent this year. United Utilities has risen 13 percent this year, Pennon 11 percent.

Severn Trent said the interested parties are required to announce a firm intention to make an offer, or that they don’t intend to make one, by 5 p.m. on June 11 in accordance with U.K. takeover rules.

Deutsche Bank AG and RBC Capital Markets LLC are advising the potential bidders, according to the Borealis statement.

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