Southern Water for sale at £4bn - 4 June

Private equity houses and pension funds are likely to be among the bidders for Southern Water, the utility supplier to Kent, Sussex and Hampshire, which has been put up for sale at £4bn.

Royal Bank of Scotland's private equity arm, which bought Southern four years ago, has appointed Deutsche Bank to sell the water company, which has about 2,000 staff and assets valued at £2.9bn.

RBS owns nearly half of the shares in Southern but controls nearly 94 per cent of its economic interest under a complex ownership structure. Perry Capital and DE Shaw, the US hedge funds, are the next largest shareholders.

Southern is likely to attract considerable interest among pension funds, which have started to invest directly in companies rather than through investment funds. Ontario Teachers, the Canadian retirement fund that owns 25 per cent of Northumbrian Water, is seen as a potential buyer.

The sale of Southern could restart a battle for British water companies. Pennon, which owns South West Water, and Kelda, which owns Yorkshire Water, have been subjects of takeover speculation.

Rumours of further corporate activity in the sector were fuelled last month by a regulatory ruling in which the Competition Commission went against Ofwat, the industry regulator, and backed the merger of South East Water and Mid Kent Water.

In a note sent to clients last month, JPMorgan said there was a very high possibility that all of the UK's listed water companies could be taken over by December 2008.

Share prices in the sector have leapt recently as infrastructure funds have proved that they are willing to pay large premiums to buy companies with dependable cash flows.

Osprey Acquisitions, a consortium led by 3i and Canadian and Australian pension funds, bought Anglian Water in November for £2.25bn, a 25 per cent premium on its regulatory asset base, the value put on assets by regulator Ofwat.

Macquarie, the Australian bank, won the £8bn auction for Thames Water, the UK's largest water company, a month earlier.