Southern Water is up for sale with a £4 billion price tag in what promises to be the first of a flurry of deals in Britain’s privatised water industry.

Royal Bank of Scotland has hired Deutsche Bank to sell the water group four years after it was sold to a consortium of RBS and Vivendi Environmental, of France, for £2.2 billion. RBS now owns just under 50 per cent of the equity in Southern’s holding company, but 94 per cent of the economic interest after it bought out the French company’s 25 per cent holding – trading by now as Veolia – for between £250 million and £300 million last year.

The move comes barely six weeks after the Serious Fraud Office called off its criminal investigation into the water and sewerage utility’s failure to repay customers and its misreporting of customer performance targets. Southern supplies water to one million households across Kent, West and East Sussex and Hampshire. It treats water from two million homes and its assets are valued at £2.9 billion.

A source close to RBS said that the bank wanted to sell Southern “after a significant rerating in the sector. RBS’s private equity arm tends not to hold on to its assets longer than five years.”

Shares in publicly listed water companies have taken off recently amid talk that infrastructure or private equity funds will launch takeovers for one of or all the companies. Water companies are also due to unveil record operating profits totalling an estimated £2 billion for the past year.

Potential bidders including 3i and Macquarie, both keen infrastructure investors, could face difficulties in making a bid, as they are investors in Anglian Water and Thames Water respectively.Macquarie Bank backed the Kemble consortium last year to buy Thames Water from RWE, of Germany, for £8 billion. Pension fund groups could also show an interest in Southern, possibly as part of a consortium, in the pursuit of long-term, steady returns.

Ofwat, the water regulator, is fiercely opposed to the merger of water companies and could prove unhappy at cross-ownership.

Goldman Sachs and Merrill Lynch, the US banks, could also be possible buyers, having both set up infrastructure investment funds recently.

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