The demerger follows a review of Severn Trent's businesses

The High Wycombe-based Biffa business employs more than 5,000 people and operates waste services for private firms and local authorities.

Severn Trent said it hoped to complete the demerger by the end of the year.

The news came as Severn said it expected its annual profits to be 30-35% higher than last year, after a 15.2% rise in prices since April 2005.

'Greater choice'

The decision to demerge Biffa followed a group-wide review of Severn's businesses by chief executive Colin Matthews.

We looked at all options... it is our firm intention to demerge Peter Gavan, Severn Trent See Severn Trent's share price

"Our review demonstrated that the growth and regulation drivers of the two businesses are very different and that few operational synergies would be lost through separate ownership," said Mr Matthews.

"Shareholders will have greater choice and the opportunity to invest in two businesses with different investment characteristics," he added.

Analysts welcomed the news, noting that Biffa could become a bid target, and shares in Severn Trent were trading up 78 pence, or nearly 7%, at 1204p in morning trade.

Severn Trent's director of corporate affairs Peter Gavan told the Reuters news agency that a sale of Biffa had been discussed.

"We looked at all options," he told Reuters. "It is our firm intention to demerge. There is nothing else around it."

Refunds

In a trading update, Severn said that its overall operating performance for the year had been "encouraging". It said it expected pre-tax profits to be up by between 30-35%, thanks to higher prices and some cost reductions.

Severn said it would take a �10.6m provision for the expected cost of a settlement it made with the regulator Ofwat last month.

In March, Severn Trent announced it would refund its customers �4 each after Ofwat found it had overcharged.

The company is also being investigated by the Serious Fraud Office (SFO), which is looking into the reliability of leakage data provided by the firm.