Water Deals -- and Others -- Start to Flow Again

• By Sabrina Barker
• Jun 01, 2002

After a bit of a lull in deal activity following September 11, 2001, and the softening economy of late last year, the pace of consolidating transactions in the broad environmental industry seems to be picking up again. Not only were several substantial deals announced or consummated in the engineering and environmental sector, but two major deals also lead the way for a pick-up in deal activity in the water industry as well.

Bigger and Bigger in the Engineering Sector

Several significant deals were announced in the consulting and engineering sector of the business. First, the large MACTEC-Law deal, discussed in the March 2002 "Deal Watch" column, finally closed in February 2002, creating a $500 million firm with broad environmental and infrastructure capacity spanning all corners of the country. Elsewhere, Duke Energy, a major southeastern power utility, announced that it was selling its Duke Engineering unit -- a 1,200 person player in the environmental and energy engineering business. The business was sold to Framatome ANP, the construction arm of the major French nuclear power services firm, and the deal was expected to close sometime in the second quarter of the year.

Earth Tech continues its broad acquisition and diversification program with a consistent stream of smaller international deals, and in January 2002, the purchase of TAMS Consultants, a $70 million New York City-based transportation engineer. With its acquisitions of the past year, Earth Tech is now, by any definition, one of the "big boys" of the engineering business -- the TAMS deal will drive Earth Tech's revenues to more than $1.5 billion, 200 offices around the world and approximately 10,000 employees, putting it in the league with the URSs, Fluors, and Bechtels of the world. The company reports that more deals are on the way as it continues to build a diversified international engineering services business.

With its acquisitions of the past year, Earth Tech is now, by any definition, one of the "big boys" of the engineering business.

As had come to be widely expected, long-time industry player IT Group filed for Chapter 11 bankruptcy protection in January 2002, and the ultimate destiny of the business continues to be in question. The Shaw Group of Baton Rouge, La., stepped in to acquire the company at the time of its filing, offering (according to varying sources) somewhere between $100 million and $200 million for the assets and an additional $75 million credit facility to the company. The Shaw Group, until recently virtually unknown in this industry, concluded a similar transaction a couple of years ago, wresting the assets of Stone and Webster away from Jacobs Engineering after a prolonged bankruptcy proceeding. If Shaw is successful here, it will propel itself into a major position in the environmental engineering and remediation business, in addition to the power, water and infrastructure business, which it gained through Stone and Webster.

Other potentially interested buyers of selected IT's assets are rumored to be preparing competing offers, but whatever the outcome, it seems certain that IT's days as an independent company are over. First started as a ship-cleaning business in Los Angeles 40 years ago, and then growing into the hazardous waste landfilling industry, IT went on to become one of the dominant players in the environmental industry. After an injection of new capital several years ago by the politically prominent Carlyle private equity group of Washington, D.C., the firm embarked on an ill-fated and largely debt-financed acquisition spree which, many observers felt, had neither a coherent strategy nor an effective implementation and integration plan. As the environmental industry flattened, and as many of the firm's acquisitions failed to meet expectations, the mountain of debt incurred to accomplish those acquisitions ultimately brought the company to its knees.

As always, transactions at the smaller level continue to occur at a rapid rate. We mention several smaller acquirers in almost every "Deal Watch" column -- for example, Stantec of Edmonton, Alberta, continued with its stream of smaller and mostly U.S.-based acquisitions, picking up hydrology consultant Taggart Associates of Denver, among others. TRC is also active in the acquisition market virtually every month. The Keith Companies of Costa Mesa, Calif., acquired Universal Energy Inc. of Houston. Benatec Associates of Camp Hill, Penn., acquired WEDGCO Engineering. The list goes on and on.

Water - The Dam Breaks

On the water side of the business, the deals started to flow again, as well. A couple of major transactions were announced, almost back-to-back, in the middle of February 2002. First, the BetzDearborn business of Hercules was sold to the Specialty Materials unit of General Electric. BetzDearborn -- historically known as Betz Labs -- has for decades been one of the top providers of water treatment chemicals to the world's manufacturing and process industries. Long an independent public company, BetzDearborn was acquired by Hercules in 1998; however, Hercules' financial problems have mounted during the recent couple of years, and the water unit was sold to help pay down debt, according to Hercules officials. The businesses purchased by GE were valued at $1.8 billion (or close to two times annual sales), and include some 3,600 employees. The deal speaks volumes about the future intent of GE, which already owns Glegg Water Conditioning (recently renamed GE Water Technologies) and which is rumored to be looking for other water deals.

U.S. Filter's willingness to part with a key portion of its water treatment and purification operations also raises strategic questions about its future direction and objectives in the industry.

In the other major deal, announced two days later in late February 2002, the U.S. Filter unit of Vivendi announced that it was selling its Filtration and Separations Group to Pall Corp. This transaction, which marks a sharp change in direction for U.S. Filter -- long the consolidating platform of the U.S. water industry -- was valued at $360 million, about 1.4 times annual sales, and some 16 times trailing EBITDA. The unit is a major manufacturer of treatment products for the filtration and separation of liquids and gases, and serves the food and beverage, industrial, biotech and pharmaceutical industries, among others. This will push Pall's level of international sales to over the $1.5 billion mark and establish it as a major player in the burgeoning water re-use marketplace. Like the BetzDearborn deal with GE, this transaction is a significant one in terms of predicting the future direction and competitive profile of the international water industry. U.S. Filter's willingness to part with a key portion of its water treatment and purification operations also raises strategic questions about its future direction and objectives in the industry.

On the smaller end, Crane Environmental -- a unit of the broadly diversified Crane Corp. -- acquired Kavey Water of Venice, Fla., a manufacturer of pre-treatment equipment for water purification. This brings Crane's water business to approximately 120 people, located primarily in Florida and Pennsylvania. ITT Industries, another major diversified industrial conglomerate with substantial interests in the water business, announced that its Sanitaire Division (a manufacturer of wastewater treatment systems and products) had acquired Royce Instruments of New Orleans, a maker of water and wastewater monitoring and control products.

There was a major and quite possibly transforming transaction in the hazardous waste sector of the business, with Clean Harbors buying most of the hazardous waste management assets of Safety-Kleen.

Blockbuster Deal in Haz Waste

For the first time in several years, there was a major and quite possibly transforming transaction in the hazardous waste sector of the business, with Clean Harbors buying most of the hazardous waste management assets of Safety-Kleen. Safety-Kleen, another company still operating under Bankruptcy Code protection, agreed to sell most of its Chemical Services Division (largely comprised of the assets of the old Laidlaw Environmental and USPCI businesses) for just $46 million, plus the assumption of around $260 million in liabilities. The business will take Clean Harbors, which has been struggling back to profitability over the past couple of years, from around $200 million in revenue to somewhere well over $700 million, some 4,400 people, and a national network of incineration, landfill and hazardous waste treatment and storage capacity. Indeed, with this transaction, Clean Harbors will become the dominant -- and in many areas, the only -- major firm in the hazardous waste business. The hazardous waste industry, although in decline through much of the last decade, is still a critical and required vendor to much of the "old economy" industrial base of the country. Safety-Kleen will retain the parts washing and solvent reclamation businesses, which were the basis of the original Safety-Kleen company.

This article originally appeared in the June 2002 issue of Environmental Protection, Vol. 13, No. 6, p. 26.

This article originally appeared in the 06/01/2002 issue of Environmental Protection.