Why BetzDearborn is Worth $1.8 Billion to GE

March 27, 2002
Kline's Experts Analyze the Unexpected Deal

Many were surprised by GE's recent announcement that it was acquiring BetzDearborn from chemical manufacturer Hercules. (Hercules is retaining BetzDearborn's paper process chemicals operation, about one-third of the total business.) Surprising was the fact that BetzDearborn competes in an industry, water treatment chemicals, that is new to GE, and the price GE is going to pay for the business.

That price, $1.8 billion in cash, which is 8.3 times BetzDearborn's 2001 EBITDA of $217 million and 1.8 times sales of $1 billion, is attractive to Hercules in light of the declines in prices for specialty chemical companies. The struggling Hercules, which had paid more than $3 billion for BetzDearborn in 1998, had shopped the company around for the last year or so but couldn't find a buyer. Most potential suitors were not willing to pay Hercules a premium for this business. So why is GE willing to pay more than others thought the company was worth to enter a new business area?

"Potential growth, high margins and synergies," says Barry Friedfeld, head of Kline & Company's water treatment consulting practice. "BetzDearborn is a platform that GE can use as a springboard into the more lucrative and faster-growing full-service end of the water treatment business."

BetzDearborn is the second-largest water treatment chemical company in the world, behind leader ONDEO Nalco, which is owned by France's Suez Lyonnaise des Eaux. The chemical segment of the water treatment business is a relatively slow growing area that has taken on some of the attributes of a commodity business. Margins have been declining over recent years as the largest purchasers have begun to put orders out for bid. The real potential for growth and higher profits is in the service end of the business, particularly in outsourcing, where a company assumes total responsibility for the water treatment of a manufacturer or municipality.

Outsourcing of the industrial water treatment business alone has the potential to become a $10 billion business. Companies such as Vivendi, which owns U.S. Filter, and Suez, along with smaller firms, have begun to aggressively pursue this growing, high-margin business. According to Kline's Friedfeld, "GE has the potential to become a major player in this market as it integrates BetzDearborn into its operations. The company will be able to offer full outsourcing, bringing mechanical and chemical treatments together into a total package."

GE's Specialty Materials division is the business unit that is actually making the BetzDearborn acquisition. The division, consisting of Silicones, Specialty Chemicals, Superabrasives, and Quartz, was created about eight months ago to serve as a "growth platform for strong technology and service content businesses," according to William Woodburn, president of the division.

While the Specialty Materials division has synergies with BetzDearborn, GE's real potential in the water treatment business will come from synergies with its other units. GE Medical Systems provides diagnostic system technology that can be transferred to water. More significantly, GE already supplies equipment used in water treatment systems through GE Water Technologies, a division of GE Power Systems, which also supplies powerhouse turbines that could suffer costly damage if water is not properly treated.

Says Kline's Friedfeld, "BetzDearborn is worth $1.8 billion to GE because, with a complete portfolio of equipment, systems, services and chemicals, it is uniquely positioned to become a formidable player in the industry, with a particular edge in the burgeoning outsourcing market."

Established in 1959, Kline & Company, Inc. is one of the leading business consulting firms serving the water treatment market. Its industry specialists have completed more than 150 proprietary studies in this area and numerous syndicated reports for clients, providing them with Intelligent Insights(TM) to help them make better decisions for their businesses. Kline's water treatment consulting business is part of its Chemicals and Materials practice, one of the company's four core industry practices that also include Petroleum and Energy, Life Sciences, and Consumer Products.

Source: Kline & Company, Inc.