Severn Trent and United Utilities rise on bid talk

27th Jan 2014 14:41

Water companies were floating higher on Monday amid reheated bid talk and better-than-expected guidance from regulators on how much slack companies would be cut in their investment plans.Severn Trent rose 1.49% to 1,703p, United Utilities jumped 2% to 714.5p and Pennon Group rose 0.29% to 681.5p by 15.18 in London amid talk of a possible private equity bid out of Canada for Severn or United.Speculation about a takeover of the UK's remaining three listed water companies has been rife as overseas investors such as Australia's Macquarie bank, Canadian pension funds and Hong Kong's Cheung Kong Infrastructure Holdings, controlled by tycoon Li Ka-Shing, have taken over companies such as Thames Water and Northumbrian Water.Last year, LongRiver Partners, which included the UK Universities Superannuation Scheme, the Kuwait Investment Office and Canada's Borealis Infrastructure Management, walked away from a potential bid for Severn after the water company rebuffed three approaches from the consortium.Meanwhile, regulator Ofwat set a wholesale weighted average cost of capital for the industry between 2015 and 2020 of 3.7%, lower than the 5.1% allowed in the last regulatory period but closer than expected to the average level of 4.2% submitted by the companies in their business plans last month.Writing before today's announcement Harold Hutchinson at Investec said anything below 3.7% would be seen as negative.But analysts at RBC Capital Markets said: "Our key concern on both UU and SVT is that the lower allowed returns will call into question dividend sustainability and believe today's announcement will bring this risk further into focus."PW