Shares in water utility Pennon (PNN) have soared 7.5% to £10.82 after reports emerged that US private equity giant KKR had made a bid early last year for its recycling arm Viridor.

Pennon reportedly plans to put Viridor up for sale for £4bn, almost equivalent to its entire market cap of £4.2bn.

It comes after Pennon announced a strategic review in September last year, in which it said it was considering options for Viridor.

VIRIDOR ONE OF 'MOST-SOUGHT AFTER' IN 2020

Investment bankers at Morgan Stanley and Barclays have been appointed to sell Viridor, the market leader in the energy-from-waste sector and one of the UK’s most sought-after investments of 2020.

Advisers are in the process of formally kicking off the auction for Viridor, but City sources told the Telegraph newspaper that KKR had attempted to jump start proceedings with a knockout bid early last year, something which reportedly shocked several interested parties who have been lining up to make a bid.

It’s clear to see why investors are keen on Pennon’s recycling arm, particularly as strong demand for green investments makes it an opportune time to consider the best options to maximise value for shareholders.

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Growth in capital expenditure for Viridor is due to peak in the current financial year to 31 March 2020, while the business model has been de-risked with 100% of revenues under contract including 80% under long-term index-linked contracts.

In addition, three of its energy recovery facilities are in operational ramp-up with the potential for strong earnings growth in the next two years.

TREND FOR SELLING 'HIDDEN GEMS'

Commenting when Pennon announced its review back in September, AJ Bell investment director Russ Mould said there is a growing trend for companies to ‘spin off hidden gems or underappreciated operations in the hope of creating more value for shareholders.’

He cited the examples of Prudential spinning off M&G, Ferguson’s decision to separate its UK business from the rest of the group, and Smiths Group’s plans to demerge its medical arm.

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Issue Date: 13 Jan 2020