How will water’s garage sale change the industry?
Published June 30th, 2016
This month’s GWI magazine has a great story by our editor Ian Elkins on the flood of water businesses currently on the market. He names seven companies with revenues in excess of $100 million that are potentially on the block, as well as a couple of smaller opportunities, but my belief is that there is a lot more on the market.
It reflects a number of trends, probably the most important of which is the feeling that the 2009-2016 bull market run is coming to an end. Stock prices have been meandering for the past year, and even before last week’s Brexit vote, investors were looking for a sell signal. At the same time, Chinese buyers are arriving on the market and are willing to pay significant strategic premia to acquire foreign technology companies, creating a window of opportunity for private equity investors to secure rich exits. We are also seeing the decline of greentech as an investment theme. This took off in the early 2000s in the wake of the dot.com crash, but it failed to provide the kind of returns that Silicon Valley expected, and with lower energy prices it has become very difficult to raise new funds in this area.
The one field of water investment which is hot at the moment is asset ownership. The thought of a prolonged period of low interest rates and stock market volatility makes the income streams associated with investor-owned utilities and BOT (build-operate-transfer) treatment facilities appear more attractive than ever. However, only one of the eight companies listed in last month’s GWI is an asset-owning company, although another company mentioned as being about to change hands in the Need to Know section of the magazine could easily become an asset owner with the right backing (I won’t name names because this kind of inside information is why people pay for a GWI subscription).
There is a huge mismatch between the supply and demand for asset-owning water businesses. The best illustration of this is the stellar performance of American Water on the New York Stock Exchange. Its shares are up 38% from where they started the year, compared to 1.6% for the Dow Jones Industrial Average. It creates an opportunity for new funds and project development companies to launch in this area. If you are a senior executive at a major water company and you find yourself out of a job, launching a business in this area seems to be the best career move that you can make at the moment. Watch this space.
Although asset ownership is what acquirers want most of all in today’s market, unique technologies with game-changing applications in industrial market niches, and companies with interesting service propositions – and data management service offerings – are also particularly in demand. These are typically both small and rare.
The valuations attached to the current batch of sales is likely to have an impact on future investment in building water businesses. My guess is that they will show that commodity equipment such as meters and valves are travelling in one direction only: towards greater consolidation, possibly with Chinese assistance. Asset ownership, services, and unique technologies could fit a much wider range of potential buyers’ strategies, driving up values and attracting new investment into the sector. It could be an important turning point.