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

Severn Trent Plc, the U.K.’s second-largest publicly traded water company, rejected a takeover approach from Kuwait’s sovereign wealth fund and a Canadian infrastructure investor.

The proposal “completely fails to recognize the existing and potential value of Severn Trent,” the company said in a statement. Severn Trent, which supplies water to 7.7 million people, has a market value of 5 billion pounds ($7.6 billion).

The Kuwait Investment Office, Borealis Infrastructure Management Inc. and Britain’s Universities Superannuation Scheme approached the utility about a possible takeover, they said yesterday in a statement. The group has until 5 p.m. on June 11 to announce a formal intention to make an offer or that they won’t, according to U.K. takeover rules.

“I think this is not the end of this and we will see a higher bid for sure,” said Dimitra Christakou, an analyst at Bloomberg New Energy Finance. “There is strong interest from investors in the water sector recently” because it offers stable returns linked to inflation, she said today in an e-mail.

Severn Trent shares, which jumped the most in 4 1/2 years yesterday, rose 0.6 percent to 2,090 pence today in London. They’ve gained 33 percent this year. Pennon Group Plc and United Utilities Plc, Britain’s second-biggest publicly traded water utility, were almost unchanged in London trading.

Foreign Ownership

A takeover would make Severn Trent, which takes its name from two of Britain’s biggest rivers, the latest U.K. utility 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 Macquarie Group Ltd.’s European Infrastructure Funds.

Borealis Infrastructure co-owns the U.K.’s largest ports operator, Associated British Ports. Borealis is the infrastructure unit of Ontario Municipal Employees Retirement System, or Omers. Omers, based in Toronto, is Canada’s sixth-biggest pension fund manager.

The companies approached the board of Severn Trent with a view of making a possible cash offer, Borealis said in a statement yesterday.

Takeover Talk

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

“This latest approach highlights an emerging trend of foreign investment in the British water industry,” said Alasdair Wilson, a water analyst at London-based BNEF.

The Financial News website reported May 13 that Kuwait Investment Authority formed a group for a 5.3 billion-pound bid for Severn Trent, citing people with knowledge of the matter. That would be a premium to the regulated asset base of about 30 percent, in line with historical transactions in the industry, said Ashley Thomas, a London-based analyst at Societe Generale SA.

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

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.

Before it's here, it's on the Bloomberg Terminal.