The hunger for consolidation
- By Sabrina Barker
- Dec 01, 1999
Many hardened environmental industry observers thought they'd seen it all when Waste Management was acquired about a year and a half ago by upstart USA Waste, in the biggest ever deal in the industry. In retrospect, we clearly hadn't seen it all. Mega-scale deals continue to hit the front pages on an almost monthly basis, with this past summer seeing the acquisition binge at fever pitch.
Earlier this spring, U.S. Filter - long the king of the U.S. acquirers - abruptly switched sides, selling out to the French giant Vivendi, self-described as the world's largest environmental company. U.S. Filter had itself already completed a remarkable string of acquisitions during the 1990s, including such traditional leaders as Culligan, Davis Water and Waste, and Memtec. This transaction, valued at approximately $6.2 billion, was almost as large as Waste Management's, and probably had even more far-reaching implications. Indeed, the new company, which has water-related revenues of about $12 billion, raised as many questions about the future of water services in the United States as it answers.
And U.S. Filter, it turns out, was only the start. The rapid succession of moves by Vivendi's prime competitor, Suez Lyonnaise des Eaux, also of France, has almost eclipsed the dramatic earlier moves by Vivendi. During June, Suez Lyonnaise bumped the stakes up considerably by acquiring two of the largest remaining water treatment companies in the United States - Calgon Corp. (acquired for about $420 million) and Nalco Chemical (for about $4 billion) - turning Suez into what their chief executive dubbed the world's largest water treatment company. Then, in August, Suez Lyonnaise made a bid for the remaining stock of New Jersey-based United Water Resources that it did not already own, capping a three-month acquisition binge in the United States that has been nothing short of remarkable.
Although it has clearly accelerated this year, foreign ownership - particularly in the water and wastewater industry - is nothing new; the two French water giants staked out major positions in the business several years ago. Suez Lyonnaise had for several years owned a minority stake in United Water, which was the second largest water utility in the country, and one of the most diversified and progressive of any of the domestic water utilities. United's contract operations arm, United Water Services, has grabbed several of the largest new operating contracts in the last year or two, including Atlanta and Milwaukee. Likewise, Vivendi has held a controlling ownership in Philadelphia Suburban, Philadelphia's publicly traded water utility; in turn, Suburban recently acquired Consumers Water, yet another major water utility.
A new war
If it wasn't clear already, it certainly is now - a new "war" is being fought on American soil to determine who will dominate the rapidly privatizing water and wastewater treatment industry in this country. Most observers believe that this acquisition binge is being largely driven by privatization trends in the domestic water industry - Europe's leading water companies see the United States as the last great bastion of water services not yet under private control, and hence they are anxiously competing with each other to establish beachheads in this "new" marketplace.
This intensive consolidation is not simply a French battle for supremacy. Several of the private British water companies - Thames Water, Severn Trent, South West and Anglian Water among them - are also positioning to acquire capacity and build a strategic base in the U.S. water and wastewater treatment business. In late May, Yorkshire Water, now known as Kelda, established a new "high water" mark by paying almost six times revenues (or 30 times trailing earnings) for Aquarion, Inc. Aquarion was a respected Connecticut water utility, but, at revenues of about $115 million, was still a fairly small player in this consolidating business. Yorkshire's willingness to pay a premium price is strong evidence of the strategic urgency many firms feel in establishing a platform for U.S. growth.
Severn Trent, one of the largest British water companies, has long owned the Capital Controls Group, the United States' leading player in chlorine disinfection, and recently supplemented that by acquiring the disinfection business of Fischer and Porter. Thames Hyder (previously known as Welsh Water) and South West - other major British water utilities - have also been acquisitive in the areas of treatment technology, instrumentation and monitoring, and other types of water service companies.
However, consolidation is not just a foreign company phenomenon; point-of-use filtration manufacturer Recovery Engineering was snatched up by retail products giant Procter and Gamble early in the fall.
Many observers are now wondering if there will even be much of a U.S. water business in the future. A few publicly traded companies remain in the $200-$300 million plus range - Osmonics, Ionics and Waterlink, for example - but only Enron's new Azurix subsidiary (which offered stock to the public in mid-June) has revenues in excess of that range. Azurix jump-started its water business by bucking the trend and looking east across the Atlantic, buying up Wessex Water in mid-1998, and later supplementing it by acquiring the contract operations subsidiary of Canada's Philip Services group. Azurix is clearly poised to make a big "splash" in the water business, but it has yet to prove itself as a serious competitor to the European companies; its stock has plunged sharply since the initial offering.
The major foreign water companies have focused on an environment of private ownership and control for decades, and they operate at a different scale and order of magnitude from virtually any of the companies in the United States. The largest water utility in the United States is the American Water Works Corp., a domestic consolidator that currently serves 8 million people, or approximately 3 percent of the country's population; the largest three water utilities in the country serve a combined 6 percent of the U.S. population. By comparison, Vivendi and Suez Lyonnaise serve the drinking water needs of a combined total population around the world of over 160 million people. All in all, the domestic water business, once a rather sleepy industry, is sure to be a much different and faster-paced business in the future.
Engineering and consulting firms consolidate
And - surprise! - the rush to consolidate is not just happening on the water side of the environmental industry. In the engineering and consulting sector of the environmental industry, new consolidators are also rapidly emerging. URS Corp., which many would have considered an unlikely candidate as key consolidator just a couple of years ago, continues to move into the top ranks of the industry. During the summer, URS announced the surprising acquisition of leading firm Dames and Moore, valued at a good premium to current price, but well below the firm's initial public valuation. Over the past couple of years, URS also picked up Greiner Engineers and Woodward-Clyde Consultants. This creates a broadly diversified behemoth in the engineering and consulting sector, which will boast revenues in the $2 billion range.
Elsewhere, the IT Group continues its buying binge in the remediation and consulting sub-sector - picking up Fluor-GTI and several of the assets of ICF Kaiser, as well as solid waste consultant Emcon, Inc. IT has acquired about 10 companies since the Carlyle investment group of Washington provided a substantial cash infusion to the company several years ago. On a smaller scale, other firms are also leading the consolidation charge - Tyco International's Earth Tech unit continues to be an active buyer, and Denver-based MACTEC is actively beginning to roll up several smaller engineering, remediation and technology companies.
The list goes on and on. Danaher Corp. purchased Hach Company, long a top performer in the field instrumentation and environmental monitoring sector of the industry. In the solid waste sector, Allied Waste decided to move ahead with its rumored acquisition of Browning Ferris Industries (BFI), completing the restructuring of the waste industry giants. Superior Services, a Midwestern garbage hauler, was acquired by Vivendi, demonstrating the French appetite for environmental services capacity well beyond the water/wastewater field. Several other smaller public firms have been gobbled up; however, the emergence of new public firms in this arena clearly demonstrates the public's hunger for new solid waste consolidation platforms. And now that the "new" Waste Management has run into yet another bout of financial and accounting problems, it is rumored to be a takeover acquisition again as well!
This flurry of consolidation has generated a lot of excitement in the financial community, particularly as investors try to pinpoint likely future acquisition targets. However, rapid consolidation efforts are not always all peaches and cream for investors, employees or the consolidating companies themselves. Acquisition prices for some of the water companies mentioned above have been pushed to historical highs, due to high strategic interest in the assets. On the other hand, several other recent transactions, while hailed as windfalls for shareholders, have actually been valued at well below historical highs, and certainly very well below historical expectations. For example, Emcon sold below current book value, and well below the price levels that its stock enjoyed in the 1980s and early 1990s.
Many questions arise in an industry that is rapidly consolidating - as well as concerns to which investors and corporate management teams must pay careful attention. Will the emerging giants of the industry be able to integrate their vast and newly acquired array of products and services into a single seamless entity, avoiding conflicts between different acquired units of the company that may be oriented to completely different end markets and customers? Will there be conflicts of interest between different acquired units of the new larger company? (This criticism had been leveled at U.S. Filter even before the Vivendi deal - specifically, would Vivendi's revered Metcalf and Eddy design unit be able to maintain its identity and objectivity in a company dominated by products and technologies?) Will management be able to simultaneously maintain well-conceived operating and marketing plans and tight financial and profitability controls in a much larger company? In most deals, it takes several years to
really answer these sorts of questions.
Change is opportunity
Consolidation is a natural phenomenon in maturing and fragmented businesses - a condition that still characterizes many segments of the environmental services industry. Most observers believe that the environmental industry still has a few years of consolidation activity to go through before it reaches its natural structure and level of concentration, and the pace of mergers and acquisitions begins to flatten. In the meantime, the industry is sure to witness several more reconfigurations and major changes in the competitive landscape. Change is continuous, but change is also opportunity - those firms clever, well-managed and progressive enough to identify and seize the right opportunities in this consolidating market will continue to enjoy growth and profitability.
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This article originally appeared in the December, 1999 issue of Environmental Protection magazine, Vol. 10, Number 12, pp. 22-27.
This article originally appeared in the 12/01/1999 issue of Environmental Protection.