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The water sector is in a state of excitement caused by a wave of bid activity at the tail end of 2007. Indeed, following on from bids for Southern Water and South Staffordshire in October, a bumper offer rolled in for Kelda in late November. In fact, it seems that, in the wake of the credit crunch, water is one of the few sectors still able to attract bids pitched at prices audacious enough to raise eyebrows.
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The £5.4bn price tag values Kelda at a hearty 30 per cent premium to the group's regulated asset base (RAB). This high watermark price in part reflects Kelda's strong track record and its attractive debt structure. But more importantly for peers, it shows that despite the credit crunch there are still plenty of investors out there awash with money for acquisitions.
Flush infrastructure funds are viewed as the likely source of future bid interest. Water companies make particularly attractive targets for this type of investor, thanks to the defensive income streams they generate. What's more, infrastructure players have a very limited range of investment targets available to them. Excluding Kelda, there are currently only four companies in the FTSE 350 water sector. One of these companies, Pennon , is also involved in waste management. which is another hunting ground for infrastructure investors as illustrated by the bid for Biffa at the end of 2007.
However, the sector is already pricing in the takeover potential and that could hit performance in 2008 if suitors fail to materialise or acquisition hopes dwindle. What's more, a regulatory review is on the horizon and will begin in earnest next year to set the parameters within which water companies will have to operate for the next five years. As the year progresses and the review looms larger, uncertainty is likely to increase. That represents a risk for equity investors and could also hamper bids. Still, in the current fretful economic climate, water's defensive qualities are likely to continue to prove a draw.
| Company name | Price (p) | Mkt val. (£m) | P/E ratio | Div. yld (%) | 12M price chng.(%) | Last IC view |
|---|---|---|---|---|---|---|
| KELDA GROUP | 1081 | 2981.28 | 16.2 | 3.11 | 15.72 | Fairly Priced, 995p, 13 Jun 2007 |
| NORTHUMBRIAN WATER | 370 | 1918.82 | 13.8 | 3.11 | 23.13 | Good Value, 327p, 29 Nov 2007 |
| PENNON GROUP | 673 | 2346.73 | 21.2 | 2.82 | 17.4 | Fairly Priced, 667p, 29 Nov 2007 |
| SEVERN TRENT | 1493 | 3502.14 | 17 | 4.22 | 6.26 | Fairly Priced, 1,495p, 27 Nov 2007 |
| UNITED UTILITIES | 738 | 6499.46 | 12.4 | 6.17 | -2.96 | Good Value, 728p, 30 Nov 2007 |
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For a full table of contents for the FTSE 350 Outlook series, click here.
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-IC-1.5.4a-prod - 31/10/2008 13:11:34 - carlos.princz
