TAKEOVER TAKEAWAYS

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* It has been a month of mergers.

The eye-opener was Water Asset Management and JP Morgan’s move on SouthWest Water in the US. It is a rare thing, because investor- owned utilities are hard to buy: they are generally valued like annuities (which makes bid premia difficult) and they have to go through a tortuous approval process in front of state regulators. Water Asset Management got lucky because South- West couldn’t get its mind around accounting rules. The utility may have sorted out its accounting difficulties in September last year, but the company still struggled to recover its reputation with investors. Given that investor-owned utilities must continually issue new shares in order to fund their capital investment and justify their rate cases, an under-valued investor-owned utility becomes an under-funded one.

* The second most interesting acquisition of the past month was ITT’s purchase of Nova Analytics, adding an extra leg to its fluid technology division, which currently include pumps and wastewater technologies. Nova Analytics is the result of a roll-up in the water quality testing equipment market. The main problem with the water quality testing market is that measures such as biological oxygen demand, chemical oxygen demand and silt density were invented in the 19th century when testing equipment was pretty simple. Today the equipment has moved on, but the regulations haven’t. If ITT is going to make a turn on Nova Analytics, it is going to have to work hard on bringing water regulators into the 21st century.

* Other deals include Merck KGaA of Germany buying Millipore, which provides water systems for pharmaceutical companies among other things, and Von Roll buying BHU Umwelttechnik, a German wastewater specialist. The Millipore deal looks like a mistake. Merck is likely to find that selling equipment alongside chemicals does not work in practice. GE tried it in the power industry and it was not a success. The Von Roll deal is just a bit odd. Von Roll is a Swiss electrical equipment specialist with revenues of CHF710 million ($672 million). BHU is a small German water and wastewater process equipment company with revenues of CHF12 million ($12 million). Von Roll describes it as a first step into the water industry. It is certainly an obscure way in.