Xylem’s acquisition of Evoqua should accelerate growth, but not everyone is happy
Xylem is a water powerhouse and is expected to benefit as a drier climate limits supplies. More recently, it has benefited as investors have looked to the strength and durability of the business model amid economic uncertainty. Xylem has a reliable demand from the municipal water utilities it works with. The result was a stock that trades at an attractive multiple even though the broader market has struggled. On Monday, Xylem decided to use that muscle: The company agreed to buy water treatment company Evoqua Water Technologies for $7.5 billion in an all-stock deal. Evoqua shareholders will receive 0.480 Xylem shares, or approximately $52.89, for each share they own. That’s a 29% premium to Evoqua’s share price on Friday. ‘Not what we imagined!’ Evoqua shares surged 14% on the news, but Xylem shareholders are fighting back on what they see as an expensive deal. The stock plummeted about 9%, and a Raymond James analyst said the acquisition was “strongly not what we had in mind!” Read more The world is running out of fresh water. How to Invest in the Companies Trying to Avoid This Crisis Xylem management has had its eye on Evoqua for some time, analysts said. When it went public in 2017, Xylem reportedly tried to buy it. “Honeywell was also reportedly interested, and since then we think AQUA is high on XYL CEO Patrick Decker’s wish list,” Don Bilson, an analyst at Gordon Haskett, wrote in a research note Monday. “Coincidentally, Decker hasn’t been shy about discussing mergers and acquisitions over the years. And not only has Decker been open about his willingness to enter into a transformation deal, but by trading north of 20x EBITDA with XYL, he has emphasized that he has the firepower to pull off such a deal.” AQUA 1Y Mountain Evoqua is leader in PFAS remediation In announcing the transaction, the companies announced $140 million in cost savings that they expect to realize within three years of closing Estimates of cost savings “may be low” “That could be low be,” Bilson said. The combination could accelerate sales growth, multiple analysts said. They see Xylem leveraging Evoqua’s connections to expand further into industrial, healthcare and utility markets, and Xylem’s multinational size could help Evoqua in the process help grow its business outside the US Currently, Evoqua does 90% of its business in North America a out. According to Bilson, Evoqua has positioned itself as a leader in PFAS remediation, which he says “should enjoy a long tailwind as work in this area really starts to build.” There is growing demand for the removal of this “forever” chemical, and the service is expected to become a larger part of Evoqua’s revenue over the next five years. In a research note, Citi analyst Andrew Kaplowitz said there was “compelling strategic logic” in the merger of the two companies as their product and service offerings are complementary. He wasn’t surprised when Xylem shares made the news, however, as the deal will dilute Xylem’s earnings for 2024. XYL 1Y Mountain Xylem stock sells off after Evoqua deal That’s one of the issues raised by Raymond James analyst Pavel Molchanov. He wanted Xylem, which has long been a consolidator in the industry, to make an acquisition — he even cited the lack of deals in his downgrade of the stock earlier this month. However, Molchanov said he doesn’t expect this combination – the biggest water technology deal ever – to be the right one. Not only will it not contribute to Xylem’s revenue in 2024, it also poses a high level of integration risk since the two companies’ businesses have so little overlap, he said. The deal is expected to close by mid-year and is subject to shareholder approval. Xylem shareholders will own 75% of the combined company, while Evoqua investors will own the remainder. Molchanov said he wasn’t sure Xylem investors want to approve the deal, though he admitted that “very few acquisitions approved by management are rejected by shareholders.” The trading in Evoqua shares doesn’t seem to indicate an expectation of a competing bid, and some analysts have said they weren’t expecting it. However, if Honeywell makes a counter-proposal, “we wouldn’t be speechless either,” Bilson wrote. Companies involved in the broader water treatment space could be attractive in the years to come. Due to climate change, water has become scarce in many areas. The water treatment services that these companies can provide are a key component in solving this problem. – CNBC’s Michael Bloom contributed to this report.
https://www.cnbc.com/2023/01/23/xylems-acquisition-of-evoqua-should-accelerate-growth-but-not-everyone-is-happy.html Xylem’s acquisition of Evoqua should accelerate growth, but not everyone is happy
