Water companies listed on the stock market look set to test record highs in the coming weeks, amid mounting talk that there will be no British-listed operators left by the end of next year.

Shares in publicly listed groups have surged substantially higher over the past year and they have taken off again in recent weeks on speculation that infrastructure or private equity funds will launch a takeover attempt on one or all of the companies.

Kelda, the Yorkshire Water owner, is commonly cited as a possible target, along with Severn Trent and United Utilities, which also has an energy arm. Pennon, which owns South West Water, and Northumbrian Water, which owns Essex and Suffolk Water, are also seen as prime candidates for a deal.

Takeover talk was fuelled this month when the Competition Commission cleared the merger of Mid Kent Water and South Kent Water, against the wishes of Ofwat.

The water regulator is fiercely opposed to mergers of existing water companies, since such consolidation moves in the industry reduce the number of companies in operation and weaken the regulator’s ability to set the best price controls in future. Inefficiency in setting controls could mean higher water bills for users.

Industry executives have steered clear of merger activity on the assumption that Ofwat’s opposition would make a deal near impossible. However, the Competition Commission decision has raised speculation in the City that deals could be done.

The UK has ten combined water and sewerage groups and also has a further thirteen smaller companies, which deal only with water supply.

Water companies have benefited from the rush among investors to seek out infrastructure businesses. Last year Thames Water was sold by RWE, the German utility group, to Macquarie, the prolific infrastructure investor, in an £8 billion deal.

Wessex Water and Anglian Water are also in private hands.

Analysts at UBS estimated last November there was $1.3 trillion (£655 billion) of capital available to invest in infrastructure businesses, while a survey by KPMG last week found that nearly two thirds of senior utilities industry executives surveyed by the accountancy firm were contemplating merger activity.

Figures from Zephyr, the M&A data provider, show that $420 billion of M&A transactions were done in the utilities sector alone last year, up from $257 billion the year before.

Sofia Savvantidou, an analyst with JPMorgan, told clients last week that there was a “high probability” that all UK water companies covered by the broker would be taken over by December 2008.

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