JPMorgan, the US investment bank, won a £4.2 billion bid battle for Southern Water today in a move that could trigger a wave of fresh consolidation in Britain’s water sector.

A consortium led by JPMorgan, which also includes UBS and Challenger Infrastructure Fund, of Australia, beat off a rival alliance led by Goldman Sachs for the business, which supplies water to more than two million people.

Goldman Sachs was thought to have been leading the race last week. A third group led by Morgan Stanley and including Scottish & Southern Energy was also interested.

Southern was put up for sale by Royal Bank of Scotland (RBS) earlier this year after buying the group for £2 billion with Veolia, the French environmental services group, in 2003.

The deal today is expected to be taken as a value benchmark for those potential bidders mulling offers for Northumbrian Water, the Yorkshire Water-owner Kelda and Severn Trent.

The Southern Water deal represents a premium of about 25 per cent to the group’s regulated assets, against the 20 per cent premium Macquarie that paid when it offered £8 billion for Thames Water last summer.

Southern Water is the seventh-largest water and sewage company in England and Wales and supplies households across Kent, Sussex, Hampshire and the Isle of Wight.

It has the fourth-largest capital expenditure programme — £1.6 billion — for the regulatory period of 2005 to 2010.

Phil Peters, an executive director of Challenger, said that Southern Water had the highest growth profile in the water sector.

He added: “We have a high regard for its management team and significant operational improvements they have delivered over the past two years and we look forward to supporting them on the successful delivery of the £1.6 billion investment programme for the current regulatory period.

“The consortium will also be giving a high priority to working with employees and management to continue to improve customer service levels across the business.”

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