Shares in Birmingham-based Severn Trent yesterday climbed more than eight per cent after the water giant unveiled surprise plans to demerge its waste management firm Biffa.
The move to offload the division - thought to be worth more than #1 billion - follows a group-wide review by chief executive Colin Matthews.
Analysts said the decision to split off Biffa, Britain's biggest waste management business, made sense as there was little overlap with Severn Trent's water business and suggested the demerger process could also attract bidders for Biffa.
"I think it'll be viewed as positive action," said Williams de Broe's Angelos Anastasiou. "It might create buyers."
Over recent years several British water companies have branched into new areas, seeking faster growth than that generated by the core business, where returns are regulated by watchdog Ofwat.
But many are now reversing that decision, as investors often prefer them to focus on their core businesses, which generate some of the highest dividend returns on the London market.
Anglian Water group AWG agreed last month to sell its Morrison construction and project investments arm.
Severn Trent shares trade at 14.6 times earnings for the current financial year, above bigger rival United Utilities which has also branched out beyond its core water business, but below pure water companies such as Kelda on 15.1 times, Pennon on 17.4 and now AWG on 22.2.
Director of corporate affairs Peter Gavan said Severn Trent had looked at selling Biffa, but was now focused on a demerger.
"We looked at all options," he added. "It is our firm intention to demerge. There is nothing else around it."
He declined to say whether Severn Trent had received any offers for Biffa, which collects and recycles waste for business clients and local councils, as well as running landfill sites.
Biffa was acquired by Severn Trent in 1991 and expanded through the acquisition of Hales in 2003.
The High Wycombe-based business now employs more than 5,000 people.
