The Water Business Boils Down
who will get bought by whom and when?

Andrew T. Gillies, Forbes.com,

NEW YORK - Consolidation was kind to shareholders of American Water Works. Last September, the company announced an offer from Germany's RWE to purchase outstanding American Water shares at $46 each, a 35% premium to their closing price just prior to the offer.

Are more such acquisitions in store for the U.S. water business? Yes, according to Hans Peter Portner, manager of the Pictet Global Water Fund. The fund invests in companies with at least 20% of revenue derived from water activities: production, services and related technologies.

Portner sees two forms of consolidation on the horizon. The first is a trend toward privatization of America's 55,000 community water systems. The most likely model, he contends, will be "public-private" partnerships between municipalities and leading water companies such as Suez (nyse: SZE - news - people) and Vivendi Environnement (nyse: VE - news - people).

This model has taken hold in Europe, and Portner sees a fit for the United States. He argues that municipalities will need private water companies' financial muscle to upgrade community water infrastructure. His assertion finds support in estimates by the American Water Works Association, which foresees a need for $325 billion in capital spending on water distribution over the next 20 years.

Second, Portner thinks water giants will also snap up midsized companies that provide water-related technologies such as membrane filtration, ultraviolet-light disinfection systems, and consulting and engineering services.

So how to spot the likely targets? One means is the enterprise multiple, or the ratio of a company's enterprise value divided by its earnings before interest, taxes, depreciation and amortization. Enterprise value--the sum of a company's market capitalization and total debt, minus cash and marketable securities--makes a good proxy for the minimum price an acquirer must pay.

For the quarter ended September 2001, acquiree American Water Works (nyse: AWK - news - people) had an enterprise multiple of 10.5. Based on that number, we sorted the companies below into likely targets and less-likely targets. We also added a few of the likely acquirers.

Osmonics (nyse: OSM - news - people) is one of the smaller companies (by market capitalization) on our list of potential acquirees. The Minnetonka, Minn.-based firm makes membranes and membrane machines for water purification. A recent project: building a $1.7 million reverse osmosis system, which puts unclean water through a membrane, to purify the drinking water of Ottawa, Ill.

Though down 27% from a 52-week high, Osmonics still sells for 29 times latest 12-month earnings. But the firm's enterprise multiple is 10.3, making it less expensive than American Water Works. Osmonics has an enterprise value of $211 million and a price-to-cash-flow (earnings plus depreciation and amortization) multiple of 14, which is depressed relative to a five-year average multiple of 19.

From the publicly traded water utilities, California Water Service (nyse: CWT - news - people) carries an enterprise multiple of 10.5. Shares of the company, which provides services to 2 million people in California, New Mexico and Washington State, sell for just under 1.5 times revenue. The stock yields 4.6%.

Water Stocks: M&A Possibilities

Likely Targets
Company Price Change From 52-Week High Enterprise Value ($mil) Enterprise Multiple
American States Water (nyse: AWR - news - people) $33.55 -15% $567 8.1
Artesian Resources (nasdaq: ARTNA - news - people) 30.75 -4 129 10.6
California Water Service (nyse: CWT - news - people) 24.20 -15 546 10.5
IDEX (nyse: IEX - news - people) 36.24 -3 1,414 9.9
Insituform Technologies (nasdaq: INSUA - news - people) 21.75 -50 629 12.4
Osmonics (nyse: OSM - news - people) 11.90 -27 211 10.3
Pennichuck (nasdaq: PNNW - news - people) 25.30 -8 86 6.8
Philadelphia Suburban (nyse: PSC - news - people) 22.76 -8 2,173 12.7
SJW (AMEX: SJW - news - people) 79.24 -15 349 9.1
York Water (nasdaq: YORW - news - people) 26.05 -18 117 11.2
Prices as of Feb. 19. Sources: Bloomberg Financial Markets; Market Guide, FT Interactive Data via FactSet Research Systems

 

Pricier Targets
Company Price Change From 52-Week High Enterprise Value ($mil) Enterprise Multiple
Connecticut Water Service (nasdaq: CTWS - news - people) $27.50 -15% $279 13.0
CUNO (nasdaq: CUNO - news - people) 35.50 -2 575 14.4
Ionics (nyse: ION - news - people) 31.71 -6 607 15.2
Middlesex Water (nasdaq: MSEX - news - people) 22.50 -10 266 13.6
Millipore (nyse: MIL - news - people) 53.77 -20 2,872 24.1
Southwest Water (nasdaq: SWWC - news - people) 14.10 -11 192 16.8
Thomas Industries (nyse: TII - news - people) 25.30 -14 417 14.0
Prices as of Feb. 19. Sources: Bloomberg Financial Markets; Market Guide, FT Interactive Data via FactSet Research Systems

 

Likely Acquirers
Company Price Change From 52-Week High Enterprise Value ($mil) Enterprise Multiple
General Electric (nyse: GE - news - people) $36.40 -32% $466,292 17.2
ITT Industries (nyse: ITT - news - people) 56.38 -1 5,956 8.3
RWE 27.86 -17 NA NA
Suez (nyse: SZE - news - people) 29.01 -18 59,944 NA
Vivendi Environnement (nyse: VE - news - people) 32.96 -17 26,668 NA
Prices as of Feb. 19. NA: Not available. Sources: Bloomberg Financial Markets; Market Guide, FT Interactive Data via FactSet Research Systems