City analysts said they still expect takeover deals in the utilities sector despite the current regulatory review in the water sector, according to the London Evening Standard (LES).
Ofwat has laid out its methodology for setting price limits in the next regulatory period 2015-2020 (PR14) and in the last few months some analysts have said there will be no more M&A activity in the coming months.
Just this summer, Severn Trent rejected a takeover bid from the LongRivers consortium, headed by Canadian infrastructure fund Borealis.
However, analysts at JP Morgan have said not to rule out M&A in the sector because of low borrowing costs and there is “no immediate risk of the regulator” preventing a company from further gearing up.
JPMorgan’s Edmund Reid highlighted water and waste group Pennon as one to watch. He said its “waste business offers both structural growth and the potential for cyclical upside”, and raised it to Buy, up from neutral, with a 745p target.
The recommendation helped Pennon’s share price rise 9p to 690p. It has been a rumoured takeover target for some time, with traders speculating France’s Veolia could be interested, the LES reported. Some have suggested Pennon’s waste subsidiary Viridor is a target.
Reid also raised his target price for Severn Trent and United Utilities.
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