A recent deal in the water utility sector underlines the value on offer to shareholders and, with inflation-beating dividends still flowing, they remain the defensive share of choice for these turbulent times. Brokers at Liberum Capital estimate that if the 30 per cent premium paid for Veolia Water in a private deal last week was applied to the three remaining water stocks, it would imply prices of 900p for Pennon, 2,200p for Severn Trent and 920p for United Utilities - a significant premium to today's prices.
Private buyers' thirst for water assets show little sign of being quenched after Hong Kong-based businessman Li Ka-shing snapped up Northumbrian Water last year and now French utility company Veolia has sold its UK assets to Rift acquisitions, a consortium of infrastructure funds including Morgan Stanley Infrastructure and M&G. The headline price paid was £1.24bn, a 30 per cent premium to the regulatory capital value - the value of reservoirs and pumping stations - of £948m. The wider water utility sub-sector is currently only trading at an 11 per cent premium to regulatory capital value.
Buyers would need deep pockets to take out United Utilities, with a market capitalisation of £4.6bn, Severn Trent at £3.9bn, or Pennon at £2.8bn, but sovereign wealth funds could be in the frame, especially now that UK banks seem off the menu as investments. Even if a deal doesn't come along, investors get guaranteed dividend growth targets until 2015 of retail prices inflation (RPI), plus 2 per cent for United Utilities, plus 3 per cent for Severn Trent, and plus 4 per cent for Pennon. Dividend yields are already inflation-busting with United Utilities on 4.7 per cent, Severn Trent at 4.2 per cent (plus a 63p special dividend), and Pennon at 3.5 per cent. Pennon also looks set to join the FTSE 100 after shares in International Power were suspended following its takeover by French utility giant, GDF Suez.
