LONDON (Reuters) - British construction group Kier Group (>> Kier Group plc) has agreed a 221 million pound ($338 million) bid for infrastructure and maintenance company May Gurney (>> May Gurney Integrated Services plc), trumping a rival offer from Costain (>> Costain Group PLC).

Brokerages Liberum and Whitman Howard said the bid was a "knock-out" blow that made the chances of a new, higher offer from Costain slim.

State cutbacks in Britain are forcing local government to outsource more activities to the private sector and creating opportunities for companies like Kier, which are positioning themselves to offer a broader range of public services.

Kier said the deal would mean it could provide services from construction to waste collection, recycling, road maintenance and lighting.

"Across that local authority portfolio, there is virtually nothing we don't do between us and there's a huge amount of opportunities to spread our services horizontally," said Paul Sheffield, Kier's chief executive.

The acquisition would also extend Kier's business into the southwest of England and to Scotland, where May Gurney holds public sector contracts, he said.

Kier shares fell 7 percent while May Gurney's were up 17 percent at 295 pence by 1027 GMT on Wednesday, indicating that investors see a higher Costain bid as unlikely.

Whitman Howard analyst Stephen Rawlinson said Kier's bid made strategic sense and appeared to be a done deal as Costain would find it impossible to top the offer and it seemed there was no third bidder waiting in the wings.

"Kier could have spent a very large sum of money on bid costs over the next two years and still not got anywhere near the size and scale of the business it has now nearly acquired," Rawlinson said.

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May Gurney ran into difficulty last September when its shares plunged 40 percent following a profit warning and the resignation of its CEO as the company pulled out of the education services sector.

Kier's recommended offer of 315 pence per share, including 50 pence in cash, is a 35 percent premium to Costain's all-share bid made last month and gives May Gurney a valuation it has not attained since the financial crisis.

In a statement, Costain said it was considering its position and would make a further announcement in due course.

Kier said it believed the deal would enable 20 million pounds of cost savings in coming years and raise the companies' combined services revenue to over 1 billion pounds.

An institutional shareholder, one of the 30 biggest investors in Kier, said the price was high but should be worth it.

"I think the price is fairly rich... It's a niche business, very strong ... particularly in the road building area. I think they were always going to have to pay up if they were going to get it," the investor said on condition of anonymity.

"If they were buying a lesser quality business I might be more concerned."

(Additional reporting by Christopher Vellacott and Neil Maidment; Editing by Tom Pfeiffer)

By Stephen Eisenhammer