Water Investments: Demand Begins to Outstrip Supply

BY Steve Maxwell

Investor interest in the water industry continues to grow by leaps and bounds, but the availability of attractive investment vehicles continue to decline - as more and more of the publicly traded water companies are snapped up by well-heeled and hungry corporate acquirers. The U.S. water industry is continuing to undergo a dramatic consolidation and rearrangement of ownership, as a new group of industrial conglomerates battle to establish dominance in the water business.

Many of the big European firms like Veolia, Suez, and RWE/Thames, which acquired their way into the U.S. water industry during the late 1990s, began to shift direction back toward contract services, and exit various businesses in the early part of this decade. Acquiring these businesses, as well as a number of the traditional independent players in the marketplace, are several major U.S. industrial companies - led by General Electric, ITT Industries, Pentair, Danaher, 3M Corp., and others. Based upon growing concerns about future provision of clean drinking water here and around the world, and given the vast expenditures which we now know will be required to maintain our water infrastructure, many firms are jostling to gain a stake in this emerging marketplace. And what better way to gain a quick stake in a growing market than acquire a leading player or two?

A perusal of the table below demonstrates the pace of acquisition and consolidation in this industry over the past few years. General Electric has signaled its intent to be a leader in world water technology with a number of major acquisitions over the past four years. ITT continues to build a major water division, as does Pentair. Danaher has recently broadened its scope of interest beyond its traditional instrumentation and monitoring focus, with the purchase of Trojan - a major UV treatment company - late in 2004. Siemens became a major player through the acquisition of USFilter from Veolia. Independent companies like Ionics, CUNO, Osmonics, and Isco are disappearing from the public markets at a rapid pace.

As the table makes very clear, demand for water assets is high, prices to acquire attractive assets have been pushed through the roof, and ordinary investors face an increasing difficult dilemma - how to invest and successfully participate in the water industry, given extremely high valuations and a shrinking number of independent publicly-traded companies. Still, there are still a number of very attractive tradable companies which investors can buy, and that offer good potential appreciation for the future. A few of these are shown in Table 2.

In future columns, some of these individual companies will be discussed, as well as prospects which they may offer to investors. IWW

About the Author: Steve Maxwell is Managing Director of TechKNOWLEDGEy Strategic Group, a Boulder, CO-based management consultancy specializing in merger and acquisition support services, strategic planning, and market research for water and broader environmental industries. He’s also editor and founder of The Environmental Benchmarker and Strategist, a comprehensive source of related competitive and financial data. He has advised dozens of environmental services and water firms on merger, acquisition and strategy issues. Contact: 303-442-4800 or [email protected].