LONDON (ShareCast) - Shares in UK water company Severn Trent surged 5% on Monday following a report in the Sunday Times suggesting that Canadian infrastructure investor Borealis was once again considering a bid for the company.
Two years ago, Borealis bid for the company as part of a consortium with Kuwait Investment Office and the UK's University Superannuation Scheme. The bid then was 22p a share and was rejected by management as too low.
Commenting on the latest bid report, Exane BNP Paribas said that at 2,050p, the current Severn Trent share price implies a 20% premium to the group's regulatory asset base.
Exane said that historically, RAB transactions have been done at a premium of up to 30%, which would imply a takeout price for Severn of 2,350p.
It noted that the recent acquisition of Bournemouth Water by Pennon was struck at a 26% premium.
"Our leveraged model suggests that an acquisition at a 30% premium could make a 7% return on investment - before any cost or service outperformance," it added.
Meanwhile, Charles Stanley pointed out that there have been several changes since the last bid attempt, leading some industry observers to believe a deal is now more likely.
It pointed to a change in leadership, with Liv Garfield replacing Tony Wray as chief executive officer and regulatory clarity now that water companies have accepted Ofwat's final ruling on business plans for 2015-2020.
The brokerage also highlighted better visibility over the dividend and the company's focus on cost savings.
Olivetree Securities said the stock is technically attractive, with the valuation back in line with average levels relative to the FTSE.
"Earnings momentum turned a corner at the start of the year, and with 3.4% upgrades to average earnings per share in the past month, the company has seen some of the strongest upgrades in the sector," said Olivetree.
Exane rates the stock at 'neutral' with a 2,040p, while Charles Stanley has it at 'accumulate'.
At 16:00, Severn shares were up 5.1% at 2,159p.
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