Taps set to open on water deals
MEGA corporate activity in the water sector has dried up since Hong Kong billionaire Li Ka- shing’s £2.41bn purchase of Northumbrian Water in 2011 and France’s Veolia Environment’s sale in 2012 of its UK regulated assets to infrastructure funds for £1.24bn.
Broker Deutsche Bank is now of the opinion that the takeover tap in the sector could soon be turned on again.
Analyst James Brand believes that there could be major upside to the value of listed water companies, as the UK Water Act 2014 mandates the introduction of a new merger regime with the aim to make some mergers easier. Regulator Ofwat recently published a consultation to facilitate the new legislation, and proposing a two-stage process whereby a full Competition & Markets Authority (CMA) reference could be avoided if the merger was considered by the CMA, on advice from Ofwat, to be in customers’ interests.
Brand sees the UK water sector as extremely low risk. The recent regulatory review gives it visibility on prices through to March 2020.
Companies have announced new dividend policies, and barring an unforeseen shock should grow dividends at least by RPI inflation through to 2020.
Brand believes a wave of M&A could unlock synergies and allow for higher transaction multiples, as shown by Pennon’s (up 1p at 837p) £100.3m acquisition of Bournemouth Water at more than a 50pc premium to regulatory asset base.
Warrington-based United Utilities, Britain’s largest listed water company, dipped 5.5p to 957p but Deutsche remains a buyer and lifted its target price to £11 from 1040p. Rumours were rife towards the end of 2014 that an international infrastructure consortium comprising of Ontario Teachers, the Canadian pension fund, and Qatari and Abu Dhabi funds were working on an £8bn or £12 a share break up bid for UU. Punters are still waiting.
Severn Trent, another perennial bid favourite, fell 14p to 2140p despite Deutsche lifting its target price to 2350p from £22. Shareholders will no doubt remember ST’s board in 2013 rejected a cash offer of £22 per share, which included a final dividend of 45.51p, from international consortium LongRiver Partners.
The consortium, which comprised of Canadian Investment group Borealis, the Kuwait Investment Office and Universities Superannuation Scheme Limited walked away after repeatedly increasing its offer. ST’s shares disappeared down the plughole to trade at £17.
The Footsie failed to keep its head above water as the monotonous Greek saga continued. Dealers heard reports that Greece is now angling for €6.7bn from the European Stability Mechanism to pay off its debts. It closed 36.24 points off at 6,753.8, while the FTSE 250 declined 38.64 points to 17,839.79.
Across the pond, Wall Street shrugged off talk that the Fed could raise US interest rates as soon as September and rose 17 points in morning trading. It eventually closed 2.51 points lower at 17764.04.
US broking giant Bank of America/Merrill Lynch says markets are getting oversold on renewed concerns of a Greek ‘ accident’. It sees downside risks being limited, even in the event of an accident, because the European Central Bank is able to intervene to limit the risk of contagion.
The same broker on Monday posted an upbeat note on Royal Mail to clients and the shares rose 11.5p to 511.5p. It has raised its target price to £6 from £5. Positive noises from Barclays helped Reed Elsevier put on 15p to 1077p. The broker reckons the publisher looks good value compared to its peers and lifted its price target to 1225p from 1135p.
Criticism of its price comparison site Confused.com in a Channel 4 Dispatches programme dragged Admiral 19p lower to 1436p.
Selling by tracker funds ahead of its relegation from the Footsie dimmed the lights at temporary power group Aggreko, 15p cheaper at 1512p. Satellite group Inmarsat, which will be taking its place, fared no better losing 7p to 980p.
Plastic packaging group RPC jumped 16.5p to 634.5p following better-than-expected fullyear results. Revenues for the year to March rose 17pc to £1.2bn, while adjusted pre-tax profits were up 33pc to £119m. The dividend is hiked 12pc.
Nervous selling following the surprise resignation of chief financial officer Philip Bowcock prompted a 19p fall to 490p in Cineworld. Bears smelled a boardroom row.
Oxford Biomedica fell 0.14p to 9.45p despite major shareholder Vulpes Life Science Fund adding a further 1m shares to its 17.4pc shareholding and director Daniel Soland’s purchase of 500,000 shares at 9.45p a pop.
Strong full-year results helped Energy Assets put on 14.5p to 578p. The largest independent provider of industrial and commercial gas metering services saw 50pc revenue growth and a 33pc increase in pre-tax profits to £8.9m. MARKETING communications group Creston rose 6p to a 52-week peak of 134p following solid results which included a better-than-expected 8pc dividend increase to 4.2p per share. Full-year revenues rose 3pc to £76.9m and pre-tax profits improved 2pc to £10m. Revenue growth was driven by £9m worth of new business for clients including Sony, Vue Cinemas, Costa Coffee, Asda and Pfizer.