Lang stuns City by blocking rival bids for South West by Severn Trent and Wessex

Ian Lang, President of the Board of Trade, yesterday stunned investors by blocking the rival takeover bids for South West Water by Severn Trent and Wessex Water. He backed the conclusion of the investigation into both bids by the Monopolies and Mergers Commission which said that neither should be allowed to go ahead on the grounds that they were against the public interest.

The announcement, which came as a complete surprise to the stock market, in effect ruled out the possibility of further mergers between the privatised water companies.

Most analysts and commentators had expected the MMC to give at least one of the bids approval on condition that the predator offered consumers substantial price cuts.

Shares in South West Water plunged after the news, dropping 130.5p to 575p by the close of trading, wiping pounds 168m off the company's stock market value.

Earlier this week a leading City water analyst at NatWest Securities had tipped the shares as a possible "buy" at the then price of 681p on the basis that the MMC was unlikely to block the two bids.

South West Water admitted a period of "turbulence" was likely before the share price settled down. Severn Trent shares bounced back 30.5p to 605.5p, while shares in Wessex Water rose 25p to 342.5p.

The MMC went even further than Ian Byatt, the water regulator, who had suggested the bid by neighbouring Wessex could go ahead as long as consumers in both areas were offered price cuts of at least 15 per cent. Mr Byatt did not believe Wessex, the smallest of the 10 combined water and sewerage companies, could afford the reductions.

However, the MMC panel decided Wessex's bid was also against the public interest on the grounds that in the long term it would prevent cross-border competition between the two companies from developing.

Announcing his decision, Mr Lang said: "The MMC's clear view is that, in both cases, no remedy would be adequate to remedy the permanent weakening of the system of comparative regulation which would result. Against this background I have decided that neither bid should be allowed to proceed."

Several explanations for the decision were last night swirling round the City. One was that Mr Lang, in approving the MMC's decision, was responding to political pressure in the run-up to the election. The water bids were strongly opposed by Labour.

Another theory was that the MMC had taken a much harder approach after Mr Lang rejected the Commission's advice on proposed bids by the electricity generators, National Power and PowerGen, for Southern Electric and Midlands Electricity earlier this year.

A furious Vic Cocker, chief executive of Severn Trent, who claimed his bid could have provided price cuts of pounds 27 a year for each household, described the decision as "quite extraordinary". He added: "I hope this does not prove to be a victory for theory over common sense."

Mr Byatt, who has taken an increasingly tough attitude against the water companies in recent months, was clearly delighted by the decision. The MMC report endorsed Ofwat's long-held view that allowing water mergers reduced the ability to make comparisons between different companies in the industry.

"There would come a point when the loss of another comparator would irrevocably damage the whole regime of comparative competition, and that a halt would have to be called," Mr Byatt said.

The reasoning did not impress City analysts, who had been clearly wrong- footed by the announcement. One leading water analyst, who did not want to be named, complained: "What Byatt is saying is that you can be a poorly performing management of a water company but now you won't have the threat of being taken over to keep you on your toes. That's not the way markets are supposed to work."

The argument was echoed by the Consumers Association, which called the decision a mixed blessing. Mark Purdy, senior policy officer, said: "It sends the signal that the threat of takeover will not be allowed to operate in the water industry. For consumers faced with a monopoly supplier, a takeover may offer the only realistic hope of lower prices and improved standards of service."

But Keith Court, the chairman of South West Water, utterly rejected claims that the company, which faces severe water shortages, had deserved to be replaced.

Consumers in the area pay average bills of pounds 327 a year, some 50 per cent higher than the national average.

"I've been leading this company since privatisation. It's a brilliant company. We are a strong resilient group and we are doing our best for customers," he insisted.

South West Water responded by offering a 20.4 per cent dividend increase when its half-yearly results are announced on 14 November. It will take the interim dividend to 11.8p a share from 9.8p in the first half of 1995. In addition the company said customers would get a pounds 15 rebate on bills from next June, on top of a pounds 10 rebate paid out this summer.

Yesterday's news triggered bid speculation across the water sector with a narrowing window of opportunity for possible predators to merge before the next election. The MMC's decision does not apply to bids from outside the industry. Southern Electric, which earlier this year lost a takeover battle for Southern Water to Scottish Power, was being tipped as a possible predator, perhaps for South West Water.