Maxwell on Water
The U.S. water industry is experiencing a continuing rearrangement of ownership and a trend toward consolidation, a trend that has been quite pronounced in the water and wastewater treatment equipment sector.
This game of “musical chairs” in the water industry really began in earnest in 2003 and early 2004. Many of the big European firms, which had acquired their way into the U.S. water industry during the 1990s, began to recognize two important market trends.
First, the widespread shift to privatized operation they had predicted for U.S. water and wastewater utilities was simply not materializing.
Second, many of the equipment and product businesses they had acquired were not that relevant to their operations and infrastructure management “core competencies” anyway.
Hence, many of these foreign firms shifted direction and began to exit their product businesses, a trend that continues to this day. Veolia, Suez and some of the large British water companies led the way in this second “era” of water transactions.
This trend has continued, and more recently, many of the foreign owners have also divested their utility operations. RWE is exiting their Thames and American Water businesses; Kelda recently sold its Aquarion business; and rumors are swirling around other major, and formerly independent, water utility businesses.
As is now very clear, the domestic water treatment industry is increasingly being concentrated in the hands of a few large industrial conglomerates.
Most aggressive and passionate amongst this group is General Electric, which has acquired a series of major water companies over the past four years. After buying BetzDearborn and Osmonics earlier in the decade, GE acquired Ionics, one of the largest remaining independent players in the business, in late 2004. Very recently, in March of 2006, GE announced its acquisition of industry-leading membrane manufacturer Zenon Environmental of Canada.
GE has been widely questioned and criticized for paying very high multiples for these companies, but in the process, it has also built a superior, if not unassailable, market position in membrane filtration technology—and the desalination and water reuse markets, which are uniformly predicted to boom in coming years.
GE CEO Jeff Immelt continues to publicly declare that water represents one of the primary growth opportunities in all of American business.
GE is not the only company to fork over lots of dollars for the opportunity to build a strategic position in the future water market. Danaher also emerged as a key player late in 2004 with its acquisition of leading UV treatment provider Trojan Technologies. Danaher had been the most aggressive acquirer of businesses in the monitoring and instrumentation side of the business, but Trojan was its first major step into the water treatment and purification business—signaling a broader appetite.
More recently, Danaher also acquired the smaller and more industrial-oriented UV player Aquafine of California.
Another new industrial entrant to the water industry is 3M Corp., which in 2005, acquired CUNO, previously a well-regarded independent and publicly traded filtration products company. In contrast to many of the recent sellers in the industry, CUNO had a strong track record of financial performance, and it sold at a very high multiple—well over three times revenues. CUNO’s water filter product lines were expected to complement the various existing air filtration businesses of 3M.
Major foreign industrial conglomerates—as opposed to the infrastructure management companies, which characterized earlier interest in the U.S. market—also have been attracted to the North American water market recently.
Most notably, Siemens, the German industrial giant—and GE’s ubiquitous global competitor—acquired USFilter from Veolia. USFilter was the largest and most diverse water treatment and purification equipment company in the U.S. In one fell swoop, Siemens became one of the major players in the international water business, and the company continues to make smaller but additive acquisitions.
Other key players in the treatment and purification equipment arena, Pentair and ITT’s Fluid Technology division, have been relatively quiet on the mergers and acquisitions front for the last two years. ITT has not made any notable acquisitions since its purchase in early 2004 of Wedeco, the other major UV competitor to Trojan in the UV treatment market. As noted in the table on page 12, however, both firms have been major players over the past decade in the consolidation of the U.S. water industry.
Another new name has recently emerged in the water industry—one that caught most observers by surprise. Home Depot, the retailing giant, acquired two businesses in the distribution and infrastructure end of the market, National Waterworks Holdings and Utility Supply of America, better known as USA Bluebook.
Other major industrial companies have been rumored to be interested in the water industry, and we can reasonably expect to see new and perhaps surprising entrants in the future.
M&A activity is also ongoing at a somewhat smaller, and perhaps less noticed, level.
For example, Teledyne Technologies quietly continues its efforts to build a significant business in the water treatment and monitoring sector. Following the earlier acquisition of Isco, Teledyne has conducted several smaller acquisitions in the last year, including, most significantly, RD Instruments—a $30-million firm that manufactures sophisticated water velocity measurement devices.
Recently, another significant deal, which happened largely beneath the radar screen, was Layne Christenson’s acquisition of Reynolds, Inc.—a key supplier of product and services to the water and wastewater industries. Layne now has annual water-related revenues of approximately $400 million.
Private investment groups are becoming more significant players in this market too. Culligan was sold in 2004 to the large private equity group Clayton, Dubilier & Rice, Inc.
The giant chemical supplier Nalco was held by a consortium of private equity interests for several years, though its stock is now once again publicly traded. The Waterworks business acquired by Home Depot, as mentioned previously, had been owned for several years by two major private equity players.
Carlyle Group recently paid a 30% premium for Waterpik, the manufacturer of various healthcare products as well as pool and spa equipment and systems.
Finally, AIG Highstar, an investment arm of the global insurance company, acquired Utilities, Inc., one of the largest privately owned contract operators of water and wastewater utilities in the country.
The table above lists the buyer and seller in several recent transactions, as well as basic information about the terms of each deal, where available publicly.
As many major water industry assets continue to change hands, the competitive situation in the water treatment equipment industry has become very complicated. Although it has been interesting to watch where various key water treatment assets end up, it is still not entirely clear who will be major players in the next generation of this industry.
The growing participation of equity investors almost surely guarantees that many of these assets will continue to change ownership in the future as well. Most observers are betting that the water industry of the future will be dominated by the various diversified U.S. companies mentioned above—ITT Industries, GE Water, Pentair, Danaher —and perhaps several others who have not yet made their first move.
In addition, all of these consolidations contribute to the gradual decline in the number of individual water investment opportunities in the U.S.—and the growing number of Wall Street stock analysts who lament the lack of good investment vehicles.
A great paradox of the current water market is the general “disconnect” between the vast future capital requirements of the industry and the vast investment interest in the industry—it has not translated into lots of attractive publicly traded firms in the U.S.
A few new opportunities are coming into the public markets. For example, RWE just announced that it intends to spin American Water Works back into a publicly traded U.S. company. However, in general, private investors must increasingly look to overseas exchanges and markets for investment opportunities.