When Jean-Marie Messier of Vivendi and Richard J. Heckmann of US Filter toasted (with water of course) their new relationship, many industry experts were stunned. The purchase of US Filter by Vivendi was unexpected.
Granted, the tremendous growth of US Filter since 1990 should have prepared observers for change, but most industry insiders expected the company to continue to acquire rather than be acquired. So what happened?
"This is a marriage made in heaven. The synergies were just too good to ignore," said US Filter Vice President Tim Traff. "Vivendi has an enormous installed base in Europe that US Filter may now sell technologies into. They have an enormous balance sheet and a low cost of capital that we can leverage into our customer bases and allow for the momentum of company growth to continue unabated.
"US Filter goes from a mere leadership position to more than twice the size of any other water company. We now have some $12 billion to $13 billion in revenues globally. We now have leadership positions globally in all the various sub-sets of the consumer, residential, industrial, municipal and agricultural markets," Traff said.
From a business perspective, US Filter has always approached the market with a global perspective and local execution. Its decentralized management was designed to empower key local officials to be in front of the customer with decision-making authority to make them both competitive and profitable.
"Vivendi is very decentralized and during our due-diligence we discovered that they had less corporate staff per employee than US Filter. In this business the worst thing you can do is centralize corporate headquarters. The water is very different in Los Angeles than it is in Beijing than it is in Paris than it is in San Palo and you can not have people in one location telling all the others what to do," Traff said.
Maybe this union caught observers off stride because of a whiff of provincialism from the U.S. water industry. Big institutional mergers are expected in media, finance, telecommunications and the like, but the water business is no different.
As an industry "the water business is larger that the telecommunication business," according to Traff. "So why not have foreign parts in your Ford if the quality and service is high and the costs are low? The same rationale works for water.
"It is important to appreciate the enormity of this transaction by understanding what Vivendi is all about," Traff said. "Europe with its more mature population and infrastructure privatized their municipal water and wastewater treatment facilities a long time ago, which created some very big water companies."
Expansion in the water and wastewater industries has primarily come from the private sector as developing countries seek help in developing, building, maintaining and operating infrastructure. Vivendi should provide a perfect partner for US Filters push for international installations.
Vivendis water treatment business, currently conducted by its Generale des Eaux subsidiary, was founded in Paris in 1853 to supply water to cities throughout France. Today the company has more than 4,000 municipal contracts in France that provide drinking water to more than 25 million people and wastewater treatment services for some 16 million residents. Outside France, more than 65 million people receive water and/or wastewater service from Generale des Eaux. The company employs about 40,000 people in 90 countries.
While installation assistance is needed in developing countries, maintenance and operation could be the key to business in the United States.
"When you look at the U.S., most water systems were established as a federally or locally financed effort. Despite that, it is a world class potable drinking water and wastewater system." Traff said. "However, it is largely at capacity and in need of retrofits and technology upgrades. The USEPA has estimated that $140 billion dollars will be needed just to comply with existing rules and regulations. That is a lot of money and the old mentality of just raising water rates for water subsidies is not the future.
"Rates have to reflect the true cost of supplying drinking water and providing efficient wastewater treatment. The public sector has been very successful to date, but there will be a growing number of those assets that will go to the private sector for long term operations in exchange for making the investments that are required.
"That is the fastest growing aspect of our business and clearly an attraction for Vivendi to partner with US Filter and jump immediately to a leadership position in the U.S. markets," Traff said.
This is an industry driven by technology and service and some observers expect that Vivendi will significantly "up-tech" research and development functions within the industry. The relative size and strength of the new combined company should serve to the customers advantage - ultimately supplying lower cost and higher quality products and services.
"We are leveraging all our strengths," Traff said. "We have by far the broadest array of technologies now, the lowest cost of capital and the strongest management team in the industry. I think the combination of these two companies will allow our internal growth rate to increase."
Traff expects the US Filter/Vivendi deal to be consummated by the end of April or early May, but until then the two titans are still competitors. After that time, Traff said, "there will be some immediate synergies in the medium and larger cities that are looking to privatize their potable water and wastewater treatment facilities. We will be combining forces and will be very, very strong here in the United States."
