Questor share tip: Hedge your bets on Severn Trent A UK-based income investor, for example, will typically hold on to a utility share for many years. And, as the value of dividends grows over such a time, returns based on the initial investment can be significant. The 28pc premium over the RAB is based on the current asset base. Essentially it is a premium on the business based on a one-year view. However, as a water company carries out investment in its operations as determined by Ofwat's rules, the value of its RAB grows over time. If an investor plans to hold the shares for 15 years for the income, as it is likely a pension fund would want to do, this premium could appear too low. This is likely to be the basis of the board's rejection of the revised offer. However, a more bearish view involves regulatory uncertainty. Some think that the regulator is going to get tough with water companies. They argue that the next phase for Ofwat will be an increased focus on keeping consumer prices low. Ofwat is currently in the process of determining what water companies will be allowed to charge customers between 2015 and 2020. The consultation period is ongoing and we will know the rule for the next period by the end of 2014. The market generally accepts that returns from the sector are likely to be lower in the future. However, a regulated asset offers an inflation-linked, long-term investment that remains attractive even if future returns are reduced. The most important things is that regulatory returns are index linked and these assets are scarce. LongRiver has said that it will not go hostile and make a bid without the support of Severn's board. So, this raises the possibility that the consortium will walk away. Should this happen, recent share price gains are likely to be reversed and a sharp fall to the £17-a-share level is very likely. Indeed, it can be argued that there was already a takeover premium built into the shares before the approach was made. Utilities shares usually underperform going into an Ofwat review. So, should the group walk away, there is likely to be weakness due to regulatory risk as well. This means, if no increased offer is received before the June 11 "put up or shut up" date determined by the Takeover Panel, then recent gains are likely to evaporate. It appears that the bulls are holding out for a bid in the £22.50 to £23.00 area - a valuation that the bidder seems to think is too rich. We therefore appear to have hit a stalemate and a share price plunge could be in prospect. Questor thinks it is therefore better to hedge your bets and sell some Severn Trent shares and bank the profit. The funds can be reinvested in other high-yielding shares and you will still have exposure should a bid come through. With the shares trading on a 2014 multiple of 22.9 and yielding 3.9pc at this level, the official rating, however, is hold.