Five questions answered on the current takeover bid for Severn Trent

UK water company in talks over bid.

Canada's Borealis, the Kuwait Investment Authority (KIA) and the Universities Superannuation Scheme have launched a takeover bid for UK water company Severn Trent. We answer five questions on the bid.

What has the consortium offered for Severn Trent?

The companies together are believed to be willing to shell out £23 a share, valuing the company, which supplies water to more than 4.2 million households in the Midlands and mid-Wales, at £5.3bn.

Is Severn Trent considering this offer?

All the company have divulged is that the business proposal is at a very early stage; however, the consortium has until 5pm on June 11 to make a concrete offer to Severn.

What else has Severn said?

Severn, which is the largest of the 10 regulated water and sewage businesses in the UK, in a statement said:

"No proposal has been made and there can be no certainty that an offer will be made or as to the terms of any such offer, should one be forthcoming".

If Severn was to be taken over by the consortium, what would this mean?

It would mean that it is the latest water company in the UK to be snapped up by foreign investors.

The others being, Thames Water, which was purchased in 2006 for $8bn by a consortium led by the Australian bank Macquarie

Yorkshire Water owner Kelda Group was bought out a year later for $6.3bn (£4.1bn) by a consortium comprising Citigroup, Singapore sovereign wealth fund GIC, Infracapital Partners and HSBC.

What have the experts said?

Speaking to the Telegraph, Peter Atherton, an analyst at Liberum Capital, said:

"For a potential bid to be made in year three of the five-year regulatory cycle is surprising, and the bidder will be taking on considerable regulatory risk if they pay this sort of premium at this point in the cycle.”

While Severn Trent’s chief executive, Tony Wray, who announced he was stepping down just a month ago, last week told the paper:

“We are heading in the right direction,” he said. “We have more or less recovered from our dim and distant dark days. We are doing all the right things.

“It is time for me to go and do the other things I want to do in life which I have put on hold for the last eight years.”

Photograph: Getty Images

Helen Roxburgh is the online editor of Economia

Photo: Getty Images
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There are risks as well as opportunities ahead for George Osborne

The Chancellor is in a tight spot, but expect his political wiles to be on full display, says Spencer Thompson.

The most significant fiscal event of this parliament will take place in late November, when the Chancellor presents the spending review setting out his plans for funding government departments over the next four years. This week, across Whitehall and up and down the country, ministers, lobbyists, advocacy groups and town halls are busily finalising their pitches ahead of Friday’s deadline for submissions to the review

It is difficult to overstate the challenge faced by the Chancellor. Under his current spending forecast and planned protections for the NHS, schools, defence and international aid spending, other areas of government will need to be cut by 16.4 per cent in real terms between 2015/16 and 2019/20. Focusing on services spending outside of protected areas, the cumulative cut will reach 26.5 per cent. Despite this, the Chancellor nonetheless has significant room for manoeuvre.

Firstly, under plans unveiled at the budget, the government intends to expand capital investment significantly in both 2018-19 and 2019-20. Over the last parliament capital spending was cut by around a quarter, but between now and 2019-20 it will grow by almost 20 per cent. How this growth in spending should be distributed across departments and between investment projects should be at the heart of the spending review.

In a paper published on Monday, we highlighted three urgent priorities for any additional capital spending: re-balancing transport investment away from London and the greater South East towards the North of England, a £2bn per year boost in public spending on housebuilding, and £1bn of extra investment per year in energy efficiency improvements for fuel-poor households.

Secondly, despite the tough fiscal environment, the Chancellor has the scope to fund a range of areas of policy in dire need of extra resources. These include social care, where rising costs at a time of falling resources are set to generate a severe funding squeeze for local government, 16-19 education, where many 6th-form and FE colleges are at risk of great financial difficulty, and funding a guaranteed paid job for young people in long-term unemployment. Our paper suggests a range of options for how to put these and other areas of policy on a sustainable funding footing.

There is a political angle to this as well. The Conservatives are keen to be seen as a party representing all working people, as shown by the "blue-collar Conservatism" agenda. In addition, the spending review offers the Conservative party the opportunity to return to ‘Compassionate Conservatism’ as a going concern.  If they are truly serious about being seen in this light, this should be reflected in a social investment agenda pursued through the spending review that promotes employment and secures a future for public services outside the NHS and schools.

This will come at a cost, however. In our paper, we show how the Chancellor could fund our package of proposed policies without increasing the pain on other areas of government, while remaining consistent with the government’s fiscal rules that require him to reach a surplus on overall government borrowing by 2019-20. We do not agree that the Government needs to reach a surplus in that year. But given this target wont be scrapped ahead of the spending review, we suggest that he should target a slightly lower surplus in 2019/20 of £7bn, with the deficit the year before being £2bn higher. In addition, we propose several revenue-raising measures in line with recent government tax policy that together would unlock an additional £5bn of resource for government departments.

Make no mistake, this will be a tough settlement for government departments and for public services. But the Chancellor does have a range of options open as he plans the upcoming spending review. Expect his reputation as a highly political Chancellor to be on full display.

Spencer Thompson is economic analyst at IPPR