* Bid for Severn fuels M&A speculation in utilities
By Toni Vorobyova
LONDON, May 14 (Reuters) - Britain's top share index scaled fresh 5-1/2 year highs on Tuesday, taking heart from a handful of upbeat earnings and with a bid for Severn Trent (LSE: SVT.L - news) fanning expectations of more takeovers of utilities.
Severn Trent jumped 13.8 percent after the water company reported a takeover approach from a consortium led by Canada's Borealis and the Kuwait Investment Authority.
The news also boosted rival United Utilities (LSE: UU.L - news) , with traders betting on more deals in the sector. As corporate confidence recovers, investors are generally looking for merger activity to become a market driver.
"That's one story that has been a bit slow to come through this year ... That's another little ingredient to the cocktail of bullishness," said Ian Williams, strategist at Peel Hunt.
"Given the cost of financing and valuations, which are not as compelling as they were 6-12 months ago, but still (attractive) in the historic perspective, for companies looking from overseas for UK targets, there are still opportunities."
Britain's utilities sector is the most expensive in Europe, trading at 15.3 times expected earnings for this year, according to Thomson Reuters StarMine. But it is also enjoying forecast upgrades, the lowest debt to equity ratio and the highest returns on equity. The valuation also looks less expensive for foreign buyers when factoring in a weak sterling.
Gains in utilities helped the British blue chip index close 54.30 points, or 0.8 percent higher at 6,686.06 points, posting another 5-1/2 year closing high as investors showed few signs of tiring of the rally.
"I think the FTSE 100 and many of the equity markets are priced for a slow and drawn out (global) recovery. I don't think we're expensive here; I think the market could run further," said Andrew Herberts, deputy head of private investment management at Thomas Miller Investment.
On Tuesday, the British index also benefited from gains in engineering support services firm Babcock, which added 6.8 percent after posting a jump in profits, and from a 3.5 percent rise in the shares of BG Group. Although the oil and gas group missed output targets, investors instead chose to focus on its new strategy.
"We believe a strategy focused on the creation of value from the group's strong resource base, combined with cash generation and shareholder returns, should help to unlock the hidden value in the stock," analysts at Killik said in a note. (Additional reporting by Tricia Wright; Editing by Hugh Lawson)