LONDON British waste management firm Shanks Group Plc revealed a 536 million pound ($889 million) buyout approach, sending its shares soaring, but said its board and key shareholders were looking for at least 10 percent more.
Shanks <SKS.L did not name the company behind the approach but a person familiar with the matter said it was the Carlyle Group, the well-connected U.S. investor that is one of the world's biggest private equity firms.
Nick Spoliar, an analyst at Altium Securities, said the approach could prompt counter-bids from other waste companies and private equity firms, attracted by the steady returns from a business that often works with 25-year contracts.
"Businesses such as this ... have long-term characteristics which are very attractive in terms of generating predictable returns over decades," he told Reuters.
Sector rivals include France's Suez Environnement, while big-name private equity players such as Guy Hands of Terra Firma
have bought waste and water companies.
Shanks said the "highly preliminary and unsolicited" approach valued it at 135 pence per share.
Shanks said it had held "supportive discussions" with its two biggest shareholders -- Legal & General and Schroders, according to Reuters data -- and believed an offer of 150 pence or more a share would be appropriate.
Under Chief Executive Tom Drury, a former United Utilities director, Shanks has cut debt through a rights issue and disposals, and sharpened its focus on recycling, organic waste treatment, and the UK Private Finance Initiative (PFI).
Shanks cut core net debt -- which excludes non-recourse debt taken on by PFI projects -- to 198 million pounds at the end of September, down 92 million pounds from six months earlier.
The approach follows the purchases in recent years of Shanks's British peers, Cory and Biffa, by private equity groups, and highlights how buyout firms, all but sidelined by the crisis, are returning to dealmaking as debt markets thaw.
However, Altium's Spoliar said a deal at 150 pence would give the company an enterprise value (EV) of 7.1 times earnings before interest, tax, depreciation and amortization (EBITDA) -- a far cry from EV/EBITDA ratios of 10 times or more seen in the takeovers of Cory, Biffa and in other boom-year deals.
Shares in Shanks leapt 40.95 percent by 1015 GMT to 127 pence, marking a 14-month high and making the stock the best performer in the FTSE 250 index. A 135 pence offer represents a near-50 percent premium to Friday's closing price.
The person familiar with the matter said Carlyle also had some support from shareholders, adding it would not ultimately pursue a deal without board support.
Without citing any sources, the Daily Telegraph said the approach came after Shanks rebuffed three earlier approaches from the buy-out house.
Carlyle and Legal & General declined to comment. Schroders fund manager Andy Brough said 150 pence a share would be a fair price for the company.
Carlyle remains bullish about classic buyouts of public companies. That is despite disquiet among many private-equity investors, who view stock markets as overvalued and harbor bad memories of deals done at frothy valuations.
(Reporting by Quentin Webb and Paul Hoskins; additional reporting by Simon Meads; editing by David Cowell)