May 14, 2013 / 9:44 AM / 5 years ago

UPDATE 2-Severn Trent shares leap on takeover approach

* Talks at very early stage

* Consortium being advised by Deutsche Bank

* Severn Trent shares up 18.9 percent (Adds consortium statement, deadline, advisers)

By Anjuli Davies

LONDON, May 14 (Reuters) - Shares in Severn Trent surged to all-time highs after the British water company confirmed it had received a takeover approach from a consortium including Borealis Infrastructure and the Kuwait Investment Office.

The group, which said on Tuesday the consortium also included Britain’s Universities Superannuation Scheme, said the approach was at an early stage and no proposal had been made.

Shares in Severn Trent, which is being advised by Rothschild and Citi, were the top gainers on Britain’s benchmark FTSE 100 index, rising as much as 18.9 percent to an all-time high of 2,170 pence at one stage.

Britain’s other two remaining listed water companies Pennon Group and United Utilities also rose by 4.3 percent and 4.1 percent.

“United Utilities and Pennon will attract further speculative interest,” said Securequity sales trader Jawaid Afsar. “These are cash cows, generating huge amounts of profits and generating very good dividends, and these make attractive targets for overseas investors.”

Afsar said he would look to buy United Utilities on any dip in the company’s share price.

Under British takeover rules the consortium now has until 1600 GMT on June 11 to either make a firm offer for Severn Trent or walk away.

Magazine Financial News had earlier reported Severn Trent could be the target of a 5.3 billion pound ($8.1 billion) offer by Borealis, a Canadian infrastructure investor.

The consortium, which is being advised by Deutsche Bank and RBC, had indicated it would be willing to offer between 22.5 pounds and 23 pounds a share for the British utility, two sources told the magazine.

“The ‘Consortium’ confirm that they recently made an approach to the Board of Severn Trent with a view to making a proposal regarding a possible cash offer for the entire share capital of Severn Trent,” Borealis Infrastructure Management said in a statement.

Yield-hungry investors have been showing strong interest in British water and sewerage firms as they seek stable cash flows and a favourable regulatory structure.

Big investors like pension funds and insurers have been increasingly investing in companies directly or teaming up with partners.

“There have been endless speculations that income-hungry funds would bid for the three remaining listed UK water companies,” analysts at brokerage Liberum said in a note on Tuesday.

“But for a potential bid to be made in year three of the five-year regulatory cycle is surprising, and the bidder will be taking on considerable regulatory risk if they pay this sort of premium at this point in the cycle.”

UK water companies have regulated price controls set every five years by the regulator, with the next one due in 2015. Bidders can be deterred from making an approach halfway through a cycle, given the uncertainty over the next review.

Analysts at Liberum noted that based on Severn’s regulated asset value (RAV) the implied premium of 38 percent in an offer of 22.5-23 pounds a share would be high by historic standards.

There has been a flurry of deals in the British water sector in recent months and years, with bankers saying past deals have been valued at a premium of about 30 percent to the RAV. ($1 = 0.6517 British pounds) (Additional reporting by Sudip Kar-Gupta, Kate Holton and Sylvia Westall; Editing by Will Waterman)

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