Severn Trent, which supplies 4.2 million households and businesses across the Midlands and parts of Wales, confirmed it has received a joint approach from Canadian investment group Borealis, the Kuwait Investment Office and Universities Superannuation Scheme.
A deal for the FTSE 100 Index group would make it the latest British utility to fall into foreign ownership after buyouts including Yorkshire Water, Northumbrian Water and Thames Water.
Borealis already co-owns the UK's biggest ports operator Associated British Ports and the London to Paris High Speed 1 rail line. It invests on behalf of thousands of Canadian workers and pensioners in the Ontario Municipal Employees Retirement System. The Kuwait Investment Authority invests the emirate's vast oil wealth. The Universities Superannuation Scheme invests the pensions of UK higher education workers.
Severn said the consortium is considering buying its entire share capital. At a reported £5.3 billion, that would offer a premium of more than 20% to its £4.35 billion market value on Monday.
The bid approach sent shares in Severn soaring by as much as 19% to a record high of 2170p, while two remaining listed water companies, United Utilities and South West Water owner Pennon Group, rose by more than 4%.
Water firms have been buoyed by repeated takeover speculation in recent years, with reports last year that private equity and sovereign wealth funds were circling United Utilities, which has more than three million customers in the North West.
Liberum Capital analysts said "Wow, it is actually happening", adding the buyout approach was surprising given regulatory uncertainty: "The bidder will be taking on considerable regulatory risk if they pay this sort of premium at this point in the cycle." Water regulator Ofwat rules on prices every five years and will next year decide how much bills should rise by between 2015 and 2020.
Andrew Mead, analyst at Goldman Sachs, said Ofwat could make gains from a takeover "less attractive" by limiting price rises. But he added: "Historically none of the previous approaches in the water sector that have been announced in the last 10 years have failed in taking over the water company."