LONDON Severn Trent (SVT.L) rejected a takeover offer on Wednesday that sources with direct knowledge of the bid valued at just under 20 pounds per share, setting the scene for an extended battle for control of the British water company.
The board of the company, which supplies 7.7 million people in Britain with drinking water, gave no details of the offer by a consortium including Borealis Infrastructure and the Kuwait Investment Office but dismissed it as paying only a modest premium.
Two people with direct knowledge of the deal later told Reuters the consortium had offered 10 percent above Monday's close of 18.25, valuing it at around 4.7 billion pounds ($7.2 bln).
That would represent a premium of 21 percent to the six month average share price and one of around 30 percent to the water company's regulated asset base (RAB), in line with past deals in the sector in the region of 25 to 30 percent above RAB.
But it was lower than the 23 pounds suggested by one earlier media report and the company's shares rose another 0.63 percent to 20.90 pounds in public trading on Wednesday.
"The board of Severn Trent has reviewed the proposal with its advisers and concluded that it completely fails to recognize the existing and potential value of Severn Trent," company management said after meeting with the consortium on Tuesday.
Yield-hungry investors have been showing strong interest in British water and sewerage firms as they seek stable cash flows and a favorable regulatory structure.
Any offer that valued the company at more than 5 billion pounds would make the transaction the biggest in the sector's history, reflecting an enterprise value (EV) - equity plus debt - of more than 10 billion pounds, analysts at Credit Suisse wrote in a note.
"I think it's likely to be a long one," one of the sources told Reuters, speaking on condition of anonymity, suggesting that Borealis would come back with a firm bid as a basis for further talks.
Broker Liberum, in a note to analysts, said it was likely the consortium would make a further offer before a June 11 deadline set by Britain's Takeover Panel to make a firm bid or walk away.
"We have seen many such bids in the past decade and no bidder has ever given up after just one offer. Nevertheless ... the reported price did seem high especially given where we are in the regulatory cycle."
UK water company prices are subject to regulatory review every five years 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.
Severn Trent said on Tuesday it had been approached by the consortium, which also includes Britain's Universities Superannuation Scheme, after magazine Financial News reported that it could be the target of a 5.3 billion pound ($8.09 billion) offer, or between 22.5 pounds and 23 pounds a share.
Borealis, part of Ontario Municipal Employees Retirement System (OMERS) of Canada, owns infrastructure investments with a total enterprise value of about 50 billion Canadian dollars.
KIO belongs to the Kuwait Investment Authority, the oldest sovereign fund tracked by the SWF Institute with an estimated $342 billion in assets. USS is Britain's second-biggest pension fund, managing 36 billion pounds of assets.
Seven of Britain's 10 water companies are now in the hands of private investors, with Pennon Group (PNN.L), United Utilities (UU.L) and Severn Trent the remaining three listed entities. A consortium led by Australian investment bank Macquarie bought Thames Water for 8 billion pounds in 2006, in what was then the largest deal in the sector.
($1 = 0.6554 British pounds)
(Editing by Patrick Graham)