Takeover speculation has been swirling around Britain's water utilities for months, and Severn Trent (SVT) might have just unclogged the pipes. The company, which runs the water works that supplies around 7.7 million people in Wales and parts of the Midlands, has admitted that an international consortium of investors could be about to make a bid (read here).
Rumours sweeping the market suggest a take-out price of between £22 and £23 per share, which looks about right judging by the shares 13%-odd rise to £20.61. That modest discount would reflect the chance that the buyout comes to nought. Implying a rough 25%-30% premium also stands in line with historical take-out price premiums across the sector, and with the 29% cream paid out for Northumbrian Water back in 2011.
Needless to say, United Utilities (UU.) and Pennon (PNN), the UK's other big water companies, also rallied, up 2.8% and 4.4% respectively.
Yet what is interesting about the announcement is its timing, for a couple of reasons. First, Severn Trent shares ended 2012 at £15.74 and have been in a steady uptrend all this year, closing yesterday at £18.25, their highest since late 2006. A takeover could have been launched six months back when the stock was barely above £15, when the cash generation story was no different. The second point is that Ofwat, the UK industry regulator is close to finalising its price review for the 2015-2020 five year period, with a ruling expected early next year. This implies that the consortium of possible buyers must be pretty confident that it knows what's coming.
Water suppliers and utilities in general are popular, if dull, investments for income seekers, thanks to their highly regulated and transparent revenues and cash flows. Severn Trent, at yesterday's price, implied a 4.2% yield on its 2013 forecast 75.8p per share dividend, pretty attractive against dismal rates from many savings accounts and bonds. Yet that's not rare. A quick spin through the data shows that there are 23 companies in the FTSE 100 alone offering at least that yield, including mobile network giant Vodafone (VOD), insurer Admiral (ADM) and drugs giant AstraZeneca (AZN). This suggest that investors might well thank their lucky stars for the quick-turn profit, and re-invest their windfall in the multitude of alternative yield plays London has to offer.
