By Steve Maxwell
Over the past few years—and particularly the last several months—we’ve heard a lot about the large publicly traded companies that are rapidly “disappearing” from the water industry. Most of the companies aren’t really disappearing—most are simply folding into larger and stronger organizations that are gradually building dominant positions in the industry. Some of these acquiring companies are already participants in the broader environmental business, but several are new companies, seeking to enter the U.S. water business for essentially the first time. Who are these new players and what’s driving their interest in diversifying into the U.S. water business? The column this month takes a brief look at the characteristics and strategies of these key new players.
Most of the recent high-profile acquisitions have come compliments of the two giant French infrastructural services companies—Suez Lyonnaise des Eaux and Vivendi. Vivendi (formerly Compagnie Generale des Eaux) is an international leader in utility management, infrastructure and communications, and has been a major world player in the water services industry for decades. The company employs some 260,000 people, and in 1998 had net sales of $31.7 billion Euros (roughly $30 billion). Vivendi has a stated intention to become the world’s largest environmental services provider; and the company’s actions in the United States during this past year lend strong credence to its seriousness about achieving that goal. With the $6 billion-plus acquisition of USFilter (USF) in the spring, Vivendi instantly became the largest U.S. water treatment equipment company. Vivendi is now combining USF and its international water unit; a key result will be the merging of Professional Services Group (PSG) and USF. Operating Services into the country’s largest contract operations firm—a firm that will have over $500 million in revenue. Some people have speculated that this unit may eventually offer stock to the U.S. public.
Vivendi has a rich history; Generale des Eaux was created by imperial decree in 1853 to irrigate the farming countryside and provide water to the main cities and towns of France. By the time the firm was 100 years old, it supplied water to over 8 million people. In the 1960s, Vivendi began to diversify into related wastewater, waste management and energy services, building district heating networks, waste incinerators and composting plants. By the 1980s, the firm began an even more thorough-going diversification program, evolving into one of France’s largest conglomerates. In the 1990s, the firm expanded further into international telecommunications, media companies, publishing, telephone company privatizations and finally—the U.S. water and waste management businesses. The company was renamed Vivendi in 1998, symbolizing the “vivacity and mobility of an international company working in locally-based activities that improve everyday life.”
Vivendi’s key rival in the race to dominate the U.S. water business is the similarly sized Suez Lyonnaise des Eaux group (SLE), also of Paris. Formed from the merger of Compagnie de Suez and Lyonnaise des Eaux (another old-line French water company) in 1997, SLE is also a world class player in infrastructural services, energy, water and wastewater, and communications. The firm’s management believes that rapid urban growth, increasing demands for environmental protection, higher standards of service, market deregulation, growing privatization and technological innovation all portend massive business changes and global opportunities for large diversified firms like SLE. Its stated ambition is to become the world leader in infrastructure services.
SLE now provides water to over 77 million people—50 percent more than all of the British water companies combined, and about 10 times the number served by the largest U.S. water utility, American Water Works Co. in Vorhees, N.J. This includes major systems all over the world, from Buenos Aires to Casablanca, Indianapolis to Manila. Subsidiary group Infilco Degremont is a major supplier of water treatment equipment, and the firm also controls Northumbrian Water of England. SLE’s domestic contract operations subsidiary—United Water Services—is the most aggressive of the U.S. operations companies. In the last year, the firm has signed up the two biggest long-term contracts in the country—Milwaukee and Atlanta. After picking up NALCO and Calgon Corporation in the middle of 1999, SLE capped its acquisition binge by picking up shares it didn’t already own of United Water Resources, the second largest water utility in the U.S. With all of these deals under its belt, SLE is now the largest water treatment company in the world.
Turning our gaze west and across the English Channel, some of the United Kingdom’s water companies—although an order of magnitude smaller than the French giants—have also been quite active in moving into the U.S. marketplace. The major private Britsh water companies were created in the late 1980s, by the privatization-minded Margaret Thatcher government, out of the country’s large regional government-owned water authorities. Today, these nine companies serve over 50 million people, employ more than 30,000 people and generate annual earnings in the range of $8 billion per year. Since the time of their creation as private entities, the British water companies have gone in widely differing strategic directions. However, almost all of them have implemented programs to diversify themselves away from total reliance on regulated British water markets, and many of them have acquired water-related businesses in the United States.
Thames is the largest of the British companies, and led the charge into U.S. diversification in the early 1990s with its acquisition of Ashbrook Corp. Severn Trent, the second largest UK company, was also quite active in American diversification activities in the early 1990s, acquiring Capital Controls in the early 1990s and building significant positions in contract operations and laboratory services in the later 1990s. Yorkshire Water (now called Kelda) is one of the medium-sized British companies, but one of the more aggressive; it recently acquired the U.S. water utility Aquarion and intends to use that company as a platform for further growth in the water services business. The other British water companies have been less acquisitive. Although these British acquisitions have come in smaller pieces over time, taken together they have been almost as extensive as the recent flurry of French investments.
It hasn’t been only foreign companies buying up U.S. water services capacity. Enron’s Azurix spin-off held out high hopes for rapid growth in the international contract operations business, but since its IPO—or initial public offering of stock—in the middle of 1999, the company’s share value has virtually collapsed. Other diversifications into the water business have come primarily from power utilities—Duquesne Energy through its subsidiary AquaSource, Minnesota Power through Florida Water Services, Duke Energy and Northern Indiana Public Service (NIPSCO) have all acquired capacity in the water services arena, apparently driven by a sense of synergies between utilities of different kinds—being able to supply “everything” to the customer.
And there are others. Hercules, a major producer of chemicals and explosives, picked up major water chemicals manufacturer BetzDearborn a couple of years ago, and consumer products giant Procter and Gamble has stepped into the water fray by snapping up home water filter manufacturer Recovery Engineering. Recovery, makers of Pur products and the most pure-play stock in point-of-use water treatment, has been replaced as such by WaterPik Technologies, which was spun off Nov. 29 by Allegheny Teledyne after two years of planning. Finally, other blue-chip names like General Electric, Monsanto and Dow have also developed substantial internally grown water service businesses. The entrance of these major new players merely serves to emphasize the longer-term size and significance of the emerging global water industry.
Such transitions as mentioned above will continue to occur in the water treatment industry with lines between market segments blurring as companies become more vertically and horizontally integrated as global entities. This affects point-of-use/point-of-entry equipment dealers insomuch as their suppliers remain attractive investments for larger conglomerates, water-related or otherwise. In the next column, we’ll return to a more in-depth discussion of the companies in the attached table, and a summary of the key issues that investors should be watching and studying as they evaluated investment opportunities in the water industry.
About the author
Steve Maxwell is Managing Director of TechKNOWLEDGEy Strategic Group, a Boulder, Colo.-based management consultancy specializing in mergers and acquisitions, and strategic planning services to the water and environmental services business. Maxwell is also editor and publisher of The Environmental Benchmarker and Strategist, an industry newsletter covering competitive and financial developments in the broader environmental services industry. He consults frequently to companies on transactional and strategic issues, and can be reached at (303) 442-4800.