Flooding the Market

• By Sabrina Barker
• Dec 01, 2001

The consolidation trend in the overall environmental industry continues, but transactions between various types of water and wastewater companies have dominated the merger and acquisition scene during the past quarter.

Sold American

The blockbuster deal was RWE A.G.'s announcement in mid-September that it intended to acquire American Water Works -- the largest water utility in the United States -- for a total enterprise valuation of approximately $7.5 billion. Although this potential transaction had been rumored for weeks, earlier reports had indicated the deal was off. RWE is a major German utility and industrial combine, which last year acquired major British water utility Thames Water, and which has been shopping for U.S. water acquisitions. American Water Works provides water to more than 10 million people in 1,300 different communities across the United States, and has been perhaps the most aggressive domestic consolidator.

The price was approximately 30 percent higher than American Water's all-time high, and represented a very high valuation -- over five times annual revenue -- in the same rarified neighborhood of some of the hugely priced water acquisitions by French and British firms a couple of years ago. Like any other public utility transaction, this deal will need to be approved by a plethora of state agencies and public utility commissions, and it will not necessarily be a slam dunk; indeed, American Water itself gave up on its attempted acquisition of San Jose Water last year due to frustrations with trying to get the proper approvals, particularly in the state of California.

This development puts the ownership of most of the large U.S. water utilities in the hands of European players and brings into better focus the likely future international competitive scenario. Early indications were that American's operations would be combined under Thames, which already provides water and wastewater services to over 40 million people worldwide.

Earlier, American Water had itself announced a couple of significant deals. In early August, it had announced the purchase of Azurix North America from Enron. (We have commented before on the re-privatization of the struggling Enron water subsidiary.) The exact set of assets to be transferred in this transaction was not clear, but it was stated to include some $160 million in annual revenues and approximately 1,000 employees. It did not include the Wessex Water operations of Azurix in the United Kingdom. Then, towards the end of August, the firm announced a divestiture transaction. American Water and Aquarion (the U.S. arm of the British water firm Kelda Group) announced a complex swap of assets, in which Aquarion acquired five American subsidiaries in Connecticut, Massachusetts, New York and New Hampshire for a total valuation of about $230 million. This deal, which increased Aquarion's base of business by almost 50 percent, is also subject to numerous approval requirements.

The ownership of most of the large U.S. water utilities are now in the hands of European players, and this development brings into better focus the likely future international competitive scenario.

Catching Smaller Fishes

On a smaller scale, publicly traded water utilities Artesian Resources and Middlesex Water announced that they are in negotiations regarding the sale of Middlesex's Delaware subsidiary, Tidewater Utilities.

Elsewhere in the water sector, in a transaction quite different from most in the last several years, the city of Indianapolis agreed to buy back the assets of the Indianapolis Water Company from NiSource, a regional natural gas and electric power utility. With the trend towards privatization and out-sourcing over the past few years, this was one of the first major instances in which a municipality was a buyer rather than a seller. The deal was valued at just over $500 million, and had been forced by Federal regulators as a result of NiSource's merger last year with Columbia Energy. The city plans to contract out management of the water infrastructure to as yet unspecified private contractors, similar to the manner in which the city's wastewater operations are managed.

The French Connection

On another note, both of the French giants have now finalized arrangements for their equities to trade on the U.S. exchanges. Vivendi Environnement, which holds all of the firm's water and wastewater infrastructure assets, including the former Compagnie Generale des Eaux, and which is 72 percent owned by the parent, started trading on the New York Stock Exchange (NYSE) on October 5. It earns approximately half of its revenues from water, and much of the rest from waste management and transportation services. Its chief rival, Suez, began trading ADRs on the NYSE in late September. Suez earns approximately 10 percent of its total revenue in various U.S. businesses, primarily through key U.S. subsidiaries United Water and Ondeo Nalco.

Deals in Non-Water Sectors

In terms of transactions in the broader environmental services arena, Canada's Stantec announced another deal -- this time acquiring the Pentacore Companies, an environmental and civil engineering firm with several offices across the western mountain states. The remnants of the McLaren-Hart group also changed hands again; acquired out of bankruptcy proceedings earlier this year by the J.A. Jones group in Charlotte, N.C., most of the McLaren-Hart offices and assets have apparently been sold again -- this time to the ENSR International Group.

Leading instrumentation and process control company Danaher also announced a very major transaction -- by far the largest in its long history of acquisition based growth. In early August, it announced an unsolicited $5.5 billion bid to take over key tool-making rival Cooper Industries. This deal, which will probably not impact the firm's environmentally related businesses, was not a friendly one, and at press time, it was not clear what the ultimate outcome may be.

And the previously mentioned rush to "go private" also continues. STV Group, a low-visibility but partially publicly-traded transportation and environmental engineering firm approved a deal in which the company's employees stock ownership plan (ESOP) acquired remaining public shares for $11.25 each. Like most other small and thinly traded engineering firms, STV felt largely ignored by investors and had been seeking some sort of transaction for several years.

Sevenson Environmental, one of the most consistently profitable and well-managed companies in the remediation sector announced a more complex route in returning to private ownership. The firm publicized its intention to commence a procedure under the Securities and Exchange Act of 1934 to "deregister" its common stock, after which its stock will no longer be listed and the company will no longer publicly report financial data. This deregistration process is permissible when the company no longer has more than 300 shareholders. CEO Mike Elia indicated the firm had decided to take this step because it felt the low trading volume in its stock no longer reflected the strong performance and progress, which the company has achieved. "We will focus our efforts on developing a plan that will enable our public shareholders to realize the fair value of their shares and hope to have such a plan no later than the first quarter of next year," he said.

Vivendi Environnement, which holds all of the firm's water and wastewater infrastructure assets, started trading on the New York Stock Exchange (NYSE) on October 5.

EA Engineering's lengthy ordeal to return to private ownership was also finalized in late September. Going forward, EA will be owned by a group of previous management and by the Louis Berger Group, a diversified international consultancy based in East Orange, N.J.

Finally, also on the transportation side, Parsons announced in mid-September that it was acquiring bridge engineering firm Finley McNary Engineers, Inc., a leading intentional firm based in Tallahassee, Fla., and TRC acquired leading east coast transportation consultant SITE-Blauvelt.

Regrouping After September 11

It is still too early to predict the impact of the September 11 tragedies on the economic and business outlook in general, and on the pace and intensity of environmental mergers and acquisitions more specifically. It is clear that this event -- and its apparent acceleration of lingering weaknesses in the economy -- has forced many companies to pull back and take on a decidedly more cautious attitude towards the near-term future. In turn, many organizations are re-evaluating the near-term future and their own growth and expansion plans, particularly in terms of planned acquisitions or other deals. Hence, the overall impact of this complicated chain of events is likely to be a continuing slow-down in transactional activities. On the other hand, RWE announced its deal with American Water Works on the first day the stock market reopened, emphasizing its commitment to growth in the United States and its faith in the American economy and financial markets.

This article originally appeared in the December 2001 issue of Environmental Protection, Vol. 12, No. 12, p. 36.

This article originally appeared in the 12/01/2001 issue of Environmental Protection.