Insituform Technologies, Inc. is on the verge of a major proxy battle that could result in the sale of the $496-million-a-year firm.

The Chesterfield, Mo.,-based company, which ranked No. 89 on ENR’s Top 400 Contractors of 2007, is under attack by New York-based investment firm Water Asset Management LLC. The hedge fund wants to place five of its candidates on Insituform’s board, reduce the board size from seven to six members or consider selling the firm.

“We have laid out what we want with the board and it would be really beneficial to the company,” says Matthew J. Diserio, president of the three-year-old Water Asset Management, which took a 5.3% position in Insituform stock late last year.

In a March 13 letter to shareholders, Water Asset claimed that Insituform needs a management makeover since the firm has had four chief executive officers in the past five years, has had multiple and unsuccessful growth strategies and has made unprofitable acquisitions that have been “very painful.” Water Asset also has claimed that a new owner could save $50 million by cutting corporate costs and making better use of installation crews.

Insituform spokesman Charles Bosworth referred inquiries to the company’s proxy statement, which urges shareholders to reject Water Asset’s proposals at an upcoming May 19 annual meeting.

A leader in fixing ailing water and sewer infrastructure without disturbing the ground, Insituform has been whipsawed by the crunch in housing credit, which has cut fees from connecting new utilities and forced public utilities to rethink expansions.

Last year, net income slipped $13.4 million from $26 million in 2006. Operating margins have declined to 2.7% from 6.9% for the same period. The company’s stock price has tumbled from about $26 a share in April, 2007 to about $15 a share this month.

Instability in the executive suite has been a problem. Last year, Thomas S. Rooney, Jr. resigned as chief executive after disagreements with the board. The firm launched a search for a new leader although Water Asset management called for a halt in the search. On April 8,  John J. “Joe”Burgess was selected as the latest chief executive after a seven-month-long search. He had been chief executive and president of Houston-based Veolia Water North America, which provides wastewater and water services. Insituform has also just completed a strategic planning session.

So far, no institutional shareholders advisory firms such as RiskMetrics Inc. or Glass Lewis & Co. have weighed in on Water Asset’s proposals or director candidates, but Diserio says he hopes to meet with them soon.