Ecolab merger to build on Nalco’s legacy

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The fusion of Ecolab and Nalco will give both companies new opportunities for growth. Nalco’s Dave Flitman talks to GWI about why the deal makes sense.

Ecolab completed its $38.80-per-share takeover of Nalco Holding Company on 1st December, forming an $11 billion-a-year powerhouse in water, hygiene and energy services and technologies, and marking the third time that Nalco has changed hands since 1999.

 
“We’re excited about the combination because of the market leverage and because of the business model,” said Dave Flitman, president of Nalco’s water and process services division. “Over a five-year period, we hope to generate at least $500 million in growth synergies and about $150 million in cost synergies, but this is not a cost synergy play – the combination here is very much about growth, and about leveraging our expertise in water. It’s very difficult to look at any one slice of our business and say that it’s not heavily related to water treatment.”
 
The Nalco business started out in 1928 supplying chemicals to treat boiler systems on locomotives in Chicago, and chemistry has remained at its core ever since. With the arrival of CEO Erik Fyrwald in February 2008, however, the company re-shaped its strategy to add automation and control capabilities to its offering, which has helped it to double organic growth in the intervening period.
 
“We view ourselves very much as an integrated market solutions provider,” Flitman said. “Chemistry is always going to be foundational to what we do, but we felt very strongly that if we were only a chemical supplier going forward, that would limit our growth dramatically. The unique ability that we have is to take the offering capability that we have in chemistry, couple that with equipmentbased technologies, take our automation platform, and really put together integrated solutions for customers.
 
“Two years ago, we introduced a new service capability in automation called Nalco 360, where we have water treatment experts monitoring industrial processes for our customers 24/7, 365 days a year. We’ve now got more than 5,000 of these monitoring systems in place, and as customers gain confidence in our capability, so we’re able to do internal benchmarking and talk about optimisation to a customer’s internal standard. In addition to that, we’ve now got data across a wide array of operations in one industry, and we’re able to do external benchmarking without sharing names.”
 
Nalco introduced its 3D Trasar technology – which measures processes in real time and has the ability to control events every six seconds – more than a decade ago in cooling tower water systems. “We believe it’s highly valued, highly differentiated, and we’re building that platform out aggressively,” says Flitman. The company rolled it out to boiler water systems in 2009, and to membrane systems in September this year. “We’re now working aggressively to take an analogous automation platform built around 3D Trasar into wastewater treatment systems around the world,” Flitman told GWI.
 
“Today, we have a wastewater treatment business that is several hundred million dollars, and is primarily a chemistry-based offering. But as we looked at the macros, the ability to recycle and reuse water is paramount to what we need to be able to help customers do in industrial operations. We are going to place a heavy emphasis on building out our capability in wastewater treatment. Apart from automation, there may also be some equipment additions that we need to make over time to get the right hybrid solution of chemistry, equipment and automation to be able to create extreme value for our customers.”
 
Offering wastewater treatment solutions to Ecolab’s industrial and institutional customer base is one of two main ways in which Flitman sees the growth synergies between the two companies playing out.
 
Ecolab is the market leader in cleaning and sanitising within the food and beverage industry, generating close to $2 billion of its annual revenues from this segment alone. “Water consumption in cleaning and sanitising F&B plants can be as much as 60% of the total water consumed in the plant, and so this is an opportunity for Ecolab to bring in a different level of expertise that they didn’t have before,” said Flitman.
 
Although Nalco reports in three divisions, water is central to the group’s core offering, which according to Flitman is to save its customers money by reducing water and energy consumption. “The energy services business has a heavy and increasing water component to it, although it’s much more process-related,” he told GWI.
 
“Ecolab is heavily engaged in the process side of its food and beverage operations, and so there are huge commercial opportunities there to put the capabilities of both organisations together. We believe that bringing the best technology in cleaning and sanitising together with the best technology in water treatment will result in a unique offering for customers in these spaces. We believe there’s a great marriage of technology between our automation technology and their standard clean-in-place technology to help customers consume less water and be more confident that as you’re reducing that water consumption, the process is actually clean.”
 
The second way in which Flitman sees the combined group driving growth synergies is from a geographical standpoint. “As we’ve continued to drive productivity globally, we’ve disproportionately invested in the BRIC countries,” said Flitman. “These economies account for something like 18% of the company’s revenue now, and we’ve doubled our organic growth rate by growing very aggressively in the BRIC regions at a sustained rate of some 20-30% over the past two to three years. We are ahead of where Ecolab is in those regions, and we believe that legacy Nalco is in a very strong position to help Ecolab grow aggressively in those regions.”
 
Although Nalco has a number of external technology partnerships, much of its technology has been developed in-house. While two sets of private owners – including a period under private equity ownership – have ensured the organisation has remained lean, it also stifled the ability to make acquisitions, an area where Nalco had been an aggressive player in the years leading up to its takeover by Suez in 1999.
 
“We have increasingly looked for the rights sorts of technology and service acquisitions to augment our offering to the market, but our ability to go after an aggressive M&A strategy was somewhat encumbered by the balance sheet that Nalco had,” Flitman admitted.
 
“Our private equity owners loaded the company up with quite a bit of debt, so that was something that kind of handcuffed us a bit. Legacy Nalco always had very strong cashflow, but the debt service meant we couldn’t invest the lion’s share of that back into the company.
 
“When you look at the combination with Ecolab, their balance sheet is pristine, and so our ability to fund organic growth aggressively, combined with the right sort of M&A activities, is an exciting part of this merger from Nalco’s perspective,” he told GWI. “We believe the growth trajectory going forward will be very different than it was stand-alone in either company, so it’s really a win-win – there’s growth opportunities and leverage both ways.”