Who will buy GE Water?
Published November 3rd, 2016
The sale of GE Water has been rumoured for years. Now, thanks to the parent company’s decision to merge its oil and gas interests with Baker Hughes, GE Water is finally on the block. It is without doubt the highest quality large water asset to come onto the market in a decade, and its sale will reshape the whole industry.
The question is, who is going to buy it?
My bet is on a large private equity fund. That’s because I don’t think that the existing players in the industry have the money or the inclination to compete successfully in an auction, and I don’t see another industrial entering the market as GE leaves. Similarly, I don’t think that Asian buyers will push the boat out on this one.
The most serious trade buyers on the equipment side are Pentair, Xylem, Evoqua, Culligan, and if you include EPC (engineering, procurement and construction) contractors, FCC Aqualia. I think that we can rule out Veolia, Suez, and the other Spaniards because they don’t have the interest or the money. Pentair has $1.5 billion in its pocket to spend, and could potentially leverage up to take GE Water, but although it is likely to go to the final round of bidding, my guess is that it won’t come out top in an auction, because it would be difficult to integrate GE Water into Pentair’s holding company structure. Pentair has a tiny head office, with the subsidiaries acting independently, but united by the “Pentair integrated management system”. Buying GE Water would call out for closer integration in order to maximise the synergies, but creating a unitary business might at the same time undermine Pentair’s current raison d’être. It may be time for Pentair to take the final step in the transition from mini-conglomerate to focused water business, and GE Water is the best vehicle with which to make the transition, but I suspect that the Minneapolis-based company will not be able to make the transition at a price which is immediately accretive to earnings, so the deal may not happen.
Three years ago, Xylem might have been a serious contender for GE Water, simply because the company was rather lacking in direction, and a big acquisition like GE Water might have given it the semblance of strategy. Over the past three years, however, particularly with the acquisition of Sensus, the company has become incredibly focused on becoming the digital leader in the water space, linking its assets in treatment, transport and testing with all the possibilities of smart systems. It should be a matter of pride for Xylem’s management that they can now afford to turn down the GE Water acquisition with no regrets.
Evoqua is probably out of the running because there would be too many areas of portfolio overlap, and its investors are probably at the stage where they are more interested in an exit than doubling down on water. Besides, the sale of GE Water is likely to flush out potential buyers for Evoqua, so it might make sense to sit tight.
Culligan – which was bought by Advent earlier this month – is likely to be interested in GE Water. GE’s preference for pre-engineered systems and its chemicals/service revenues are a good fit with Culligan, but the business is much bigger.
I mention FCC Aqualia because now the company is owned by Mexican billionaire Carlos Slim, the company has the money for a big acquisition. It would certainly be transformational.
On the chemicals side, the potential trade buyers are Solenis, Ecolab, Kemira, Dow, BASF, and Lanxess. Solenis, like Evoqua, is more likely to be looking for an exit than a major acquisition at this stage. Ecolab would probably not be interested because there is quite a big overlap with its existing chemicals markets, as well as with the Aquatech International business it invested in earlier this year. The deal would be a great fit for Kemira on the chemicals side, but is probably beyond the Finnish company’s reach. Although Dow, BASF and Lanxess already have proprietary membrane expertise in water treatment, they probably don’t want the much broader exposure to treatment equipment that buying GE Water would bring. Other chemical companies, tired of the low margins in their core businesses, might be inspired by the way GE Water has been able to make decent margins from chemical sales by building a service model around them. They might see equipment as an interesting diversification as well, but my feeling is that a chemical company buyer with no experience of water would misunderstand the complex and difficult relationship between chemical sales and equipment sales, and make all the mistakes that GE made all over again.
In terms of Asian buyers, I suspect that this might not be a deal for a Chinese company, despite the fact that they have been leading the bidding everywhere else in water in recent months. There are two reasons for this. The first is that Chinese buyers are to a large extent motivated by the municipal market rather than the industrial market. GE Water’s real strength is on the industrial side. The second is that GE Water’s strength in chemicals is unlikely to be fully understood by Chinese buyers who view chemical supply as a separate, commodity business.
In terms of other Asians, the Korean companies (Samsung, Doosan, and GS) would probably all like to own GE Water, but the sale doesn’t come at a great moment for any of them. The Japanese companies (Mitsubishi, Hitatchi, Mitsui, Marubeni, and Sumitomo) seem to be slightly shy of running multi-polar global businesses, preferring structures where all the power is held in Japan. This is less likely to work well for GE Water.
That leaves private equity. There are a number of reasons why this is a great deal for financial buyers. First, because it presumably comes unlevered. There is a whole world of financial engineering to implement, and the steady money GE Water earns from its chemicals and services makes it quite leveragable. Second, the private equity sector is currently flush with cash, with few big opportunities to spend it. The size of the deal is exactly right for the funds who suffer most from anxieties about deploying capital. Third, there is a whole lot of upside in the company which is not immediately apparent. This makes it more attractive to private buyers than to publicly traded ones who have to be able to show immediate gains. The two specific areas I would focus on are digital water and mobile systems. GE Water has been investing heavily in digital, but it has hardly begun to market its services. With both treatment equipment and chemicals supply, it is uniquely well placed to bring together all the potential of the Internet of Things, machine learning, and big data. It is going to be a game-changer for the company, but it needs a visionary owner who can push this to realise its full potential. In terms of mobile systems, GE Water is the market leader, but it is only beginning to scratch the surface of the true market potential outside North America. Mobile modular systems with remote monitoring and control represent a paradigm shift for the delivery of industrial water solutions, and a buyer who is really prepared to push on this could see massive returns. The existing management are pretty well focused on this: it just takes an investor with the courage to back them to make it into something truly great.
In terms of leftfield buyers, we could see someone from the telecoms/IT space take an interest on the grounds that GE Water could be seen as a strong play for the Internet of Things. Another distant possibility would be a Gulf fund looking for an investment tied to the region’s future: GE Water is one of the world’s largest suppliers of desalination plants, and it also has an enviable position in the water for oil and gas market.
If you want to hear more about this, do join me for a round-table discussion on the subject at the American Water Summit in Miami on 6th December. If you want to get involved in the deal itself, do contact my colleagues Geoff Gage and Thierry Noel at Amane Advisors – they’ve advised on many of the big deals in water this year, and could be a major asset to any buyer wanting to figure out how to create shareholder value from this one.