Can consolidation be made to work in the water business?
Published October 29th, 2009
Consolidators have not done well in water in recent years. USFilter was built up into a $5 billion behemoth before being broken up by Veolia into five different parts. Severn Trent Services has followed a similar path of build-up followed by sell-off. The latest company to try a roll-up in the water sector is GLV (TSX: GLV.A and GLV.B), whose bid for Christ Water Technology (CWT.VI) was approved by the Christ board last week.
So far, the Canadian company has bought Eimco, Jones & Attwood, Enviroquip, Brackett Green, Copa, AJM Environmental Services and Elcotech as it pursues its strategy of building a Can$1 billion business. The Christ acquisition will take the company two thirds of the way towards this goal. The key question is whether, at the end of it, GLV will have built a better business or simply bolted together a number of disparate units which lend very little to each other? That was the problem for USFilter. CEO Dick Heckmann solved it by finding a wallet. He sold the company at the top of the market to Vivendi (which subsequently became Veolia). Veolia could not solve it, and broke the company up.
There are, however, a couple of things which differentiate GLV’s consolidation strategy from USFilter’s great roll-up. The first and most obvious is that GLV has a much broader international focus. It is pursuing business right across the globe: from North America, to Europe, Australasia and China. USFilter had a strong domestic focus, and Veolia cut off the company’s international activities altogether. It is only since Siemens acquired the bulk of the business that it really started to develop international markets. Reaching a global market is the only way that water technology companies can be truly profitable, but you need generate a big enough volume of sales to justify the costs of an international network. This seems to imply that rolling up a number of different water technologies does pay dividends – as long as you are global.
The second difference is that GLV has a decentralised management structure that works. Successful water technology businesses need to have a small company niche focus, combined with a big company ability to deliver globally and take financial risks. GLV is run like a holding company, while the business units are run by entrepreneurial managers, many of whom used to own the businesses they run, but still find excitement about their prospects under GLV’s ownership. USFilter grew so quickly that there was never an opportunity to develop a successful management culture in many of its units, but the bits which remained with Veolia Water Solutions & Technologies are now thriving under a decentralised management structure.
Yes, consolidation can be made to work in the water business, but only if it is international, decentralised, and slow.