Water Industry M&As: A Second Wave of Consolidation

Since our last look at mergers and acquisitions in the water and wastewater industry in March 2004, there have been some significant moves in the market -- Siemens buys USFilter assets, CD&R buys Culligan, CUNO buys PentaPure parent WTC Industries...

Aug 2nd, 2004

By Matthew Barker

Since our last look at mergers and acquisitions (M&As) in the water and wastewater industry in March 2004, "A Fresh Wave of Acquisitions in The Water Industry," there have been some significant moves in the market.

Siemens buys USFilter assets
Few will have failed to notice German conglomerate Siemens AG announce its plans to purchase the systems and services businesses of USFilter Corp. from Veolia Environnement for around $993 million. The deal, scheduled to close in late Q3, following approval by the applicable antitrust authorities, will make Siemens the largest water-services company in the United States. From Veolia Environnement's point-of-view, this disposal is a major step in strategic refocusing of its water activities in North America towards long-term contracts for both municipal and industrial clients, as announced last September. This is Siemens first major deal since signaling it was ready to spend some of its $15 billion in cash to expand its portfolio. Siemens said the water business will play a critical role in its industrial activities. The addition of USFilter will provide an increase in revenues of around 25% to its Industrial Solutions & Services (I&S) group, which made $4.8 billion in fiscal 2003 (to September 2003). Water treatment and supply's main activities are concentrated in Siemens' Automation and Drives (A&D) and I&S Groups. I&S, however, manages most of Siemens' water-related businesses, and will lead USFilter's activities. Veolia has for the past year been selling assets relating to USFilter, a legacy from former parent Vivendi, which cost it 2.2 billion euros ($2.6 billion) in write-downs in the first half of its fiscal year. The company acquired USFilter for $8 billion including debt in 1999.

With such a wide array of service capabilities, particularly, financial services, homeland security, construction services, and now water equipment capability, Siemens can provide a "one stop shop" for parts and services to municipalities. The danger with such monopolistic approach is price hikes and dissatisfaction with certain services of the company leading to negative perceptions about the whole company. GE is another company with extended technology capabilities in light of acquisitions in recent years (notably Osmonics, Betz and Glegg), but through its other divisions related to homeland security and financial services will provide a similar mix of services, although the product capabilities aren't as extensive as USFilter's.

What now for Culligan?
The Siemens deal did not include USFilter's Culligan group, which now has been publicly for sale since the latter half of 2003. USFilter's parent company Véolia has told analysts it expects to achieve Euro 640 million ($768 million) for Culligan International, which is about eight times its expected 2004 EBITDA. Some analysts believe the company could even fetch up to 11 times EBITDA, or Euro 900 million ($1.081 million).

Possible buyers touted for Culligan include Danone SA of Paris, which has been purchasing businesses in bottled water home and office delivery (HOD) worldwide, of which Culligan has become a significant player; Coca-Cola Co. of Atlanta; and Nestlé SA of Vevay, Switzerland. Also, with increasing interest in the water industry from the investment community, it's expected a number of private equity firms will bid as well, including Apollo Management LP, Blackstone Group, Carlyle Group, Kohlberg Kravis Roberts & Co. and Warburg Pincus LLC. One of the biggest sales in 2003 in the water industry was the sale of Nalco by Suez to a private equity group consisting of The Blackstone Group, Apollo Management L.P., and Goldman Sachs Capital Partners for $4.2 billion.

[Culligan, which had sales of US$682 million in 2003, has since been purchased by U.S. private equity firm Clayton, Dubilier & Rice for US$610 million, which was announced July 22. CD&R, a $5 billion buyout fund, said it plans to build on Culligan's brand and dealer network to create a stronger supplier.]

CUNO catches PentaPure
Staying in the residential and commercial arena, early June 2004 saw CUNO Inc. enter into an agreement to buy WTC Industries Inc. WTC operates through its PentaPure Inc. subsidiary, manufacturing water filtration systems and replacement filter cartridges for point-of-use (POU) applications. Its systems include residential refrigerators and under-the-counter drinking water systems.

Sales for the trailing 12-month period (through April 2, 2004) totaled $33.8 million. CUNO plans to use the purchase to increase its presence in the POU water filtration products business and expand its product line and technology portfolio. According to the company, the potable water business is its largest and fasting growing business group, and the acquisition is a strong fit for expansion in the POU sector, which Frost & Sullivan last valued at $311 million in 2000 and increasing at a compound annual growth rate of 7.9 percent to $529 million in 2007.

Under terms of the transaction, which was approved by both companies' boards of directors, CUNO will assume WTC's outstanding bank debt of about $9.5 million, resulting in a total transaction value of roughly $110 million. The transaction, which is subject to an affirmative vote of WTC's shareholders as well as satisfaction of customary conditions and applicable regulatory approvals, is expected to be complete during the third quarter of CUNO's current fiscal year.

Letting go of Leopold
Getting their feet wet with the acquisition of The F.B. Leopold Co. Inc., mid-April 2004 saw the completion of that purchase from RWE Thames Water by Leopold's executive management team and Pittsburgh-based private equity group, PNC Equity Partners. FB Leopold has been a leading supplier of filtration and clarification systems for the municipal water and wastewater treatment industry for over 80 years. RWE Thames Water owned Leopold since 1992 and cites the reason for the sale as a shift in its core business strategy to the delivery of water and wastewater services.

Conclusion
It's interesting to see how the competitive landscape has changed since the beginning of 2003. If we cast our minds back we would see then-Vivendi-owned USFilter and Ondeo Degrémont (then including Ondeo Nalco) heading the pack. It wasn't until later in the year when GE purchased Osmonics and announced a restructuring of its groups under the GE Water Technologies tag. Now, we see the aforementioned GE Water Technologies alongside Siemens-owned USFilter, ITT Industries, Pentair and Ionics among the top tier of competitors. It will be interesting to see what the next few months have in store.

About the Author:
Matthew Barker is program manager for water and wastewater at Frost & Sullivan, a global growth consulting company covering custom strategic consulting, market intelligence and management training spans the globe with offices in every major country. The March 2004 report referred to in this article can be found at its website (free registration required). Barker can be contacted at mbarker@frost.com.

Water Finance & Investment
Frost & Sullivan also recently released a report entitled "U.S. Water Financing Opportunities". And, in August, the North American Environmental Technologies Group is going to present a briefing on the Global Opportunities in Water & Wastewater geared towards the investment community. To register your interest, please email mbarker@frost.com.

Other recent Frost & Sullivan articles and reports include:
* Multi-Barrier Water Treatment Technology: The Future of Drinking Water Treatment?
* 'Private-Public Partnerships' a Viable Solution for the Cash-Strapped Water Industry
* U.S. Advanced Water Treatment Equipment Markets
* U.S. & Canada Membrane Bioreactor Markets
* U.S. Water Treatment Chemicals Markets

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