Shares in Birmingham-based Severn Trent yesterday extended gains made on Monday after an in-line trading update added to increased bid speculation surrounding the utility group.
On Monday shares in Severn Trent soared on the back of consolidation hopes after AWG confirmed it had accepted a 1,555 pence per share offer from Osprey Acquisitions, a newly-formed consortium of mainly Canadian pension funds.
Yesterday, both Citigroup and Merrill Lynch highlighted Severn Trent's own attractions as a takeover target.
In a note to clients, Merrill Lynch said Severn Trent continues to look relatively attractive - particularly if it is to move close to a four per cent yield post waste management business Biffa's de-merger next Monday.
In its trading update, Severn Trent reported rising operating costs as it continued its battle to contain leaks from its pipes.
Regulator Ofwat criticised the firm earlier this year for failing to reduce leakages and told it to spend £170 million on plugging the holes.
Severn Trent expects higher operating costs of around £4 million in the first half with a full year impact of around £6 million as a result of its leakage management and efforts to improve customer service.
It also said the impact of Ofwat's fine for customer service failures to cut first half profits before interest, tax and exceptional items by £3.2 million.
Leakage by water firms in England and Wales fell by around 20 million litres a day between 2005 and 2006, despite failures by Severn Trent and Thames Water.
Thames lost 895 million litres per day from its network - its target was 860 million - while Severn leaked 540 million a day against a planned 505 million.
United Utilities in the North-west and Southern Water were the other companies which failed to meet Ofwat's leakage targets.
Severn Trent said it had delivered a first-half performance "broadly consistent" with expectations for the full-year results as it increased prices in line with regulatory guidance by 6.58 per cent.
Severn Trent has a stock market value of around £4.7 billion and serves eight million customers in three million households and businesses from mid-Wales and the Bristol Channel to the Humber Estuary.
The company was recently allowed to increase bills by 15.2 per cent in return for investment in the network.
Severn added that it expected dealings in Biffa to start on October 9 if the demerger is approved at an extraordinary general meeting on Friday.
As the demerger of Biffa is expected to occur during the second half, Severn Trent said that Biffa would be included in the results of the group's continuing operations for the first half year.