Two years after Veolia’s merger with SUEZ, a new industry-shaping acquisition in the water industry is announced: The globally leading water technology company Xylem announced an agreement over the acquisition of Evoqua in an all-stock transaction that reflects an implied enterprise value of approximately $7.5 billion. Back in 2017, Xylem already planned to acquire Evoqua, but the majority owner, AEA Investors LP preferred an IPO and rejected Xylem's bid. Xylem’s previous offer was valued at around $2.5 billion.

‍What are the main reasons for Xylem’s persistence?

‍Evoqua Water Technologies, a leader in North American water treatment, complements Xylem’s distinctive portfolio of solutions by offering advanced water and wastewater treatment capabilities, a vast network of service professionals, and access to several attractive, recurring revenue streams in industrial markets. With its solutions, including digitally enabled offerings, Evoqua optimizes and outsources mission-critical water treatment systems for companies in high-growth sectors such as life sciences, microelectronics, power, and food and beverage. Evoqua is also a leader in the remediation of emerging contaminants, such as PFAS. Furthermore, Evoqua’s subsidiary “Magneto Special Anodes” offers Xylem the strategic option to supply the rapidly growing hydrogen electrolysis market. For electrolysis in acid or neutral media (e.g., PEM water electrolysis), Magneto offers titanium-based anodes, and for electrolysis in alkaline media, nickel-based anodes.

In the 12-month period ending September 30, 2022, Xylem and Evoqua generated over $7 billion in combined revenue and $1.2 billion in adjusted EBITDA. With scale efficiencies in procurement, network optimization, and corporate costs, the combination will unlock compelling new growth opportunities and deliver run-rate cost synergies of $140 million within three years. As a result of the transaction, Xylem will maintain a strong balance sheet, which will give the combined company significant strategic flexibility.

The acquisition will significantly strengthen Xylem’s industrial water solutions, as 82% of Evoqua’s revenue can be attributed to the industrial water segment. The vast majority (again 82%) of Evoqua’s business is focused on the US market. As a result, Xylem emerges as the unchallenged dominator of the North American water technology market.
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Market reaction
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‍While shares of Evoqua Water Technologies Corp. (AQUA) soared 14.6% toward a nine-month high in premarket trading Monday, Xylem's stock tumbled 9.7% toward a three-month low.

‍Opinion

‍While the acquisition is initially not very well perceived by Xylem’s shareholders, the long-term potential is immense. The purchase will result in the formation of the largest global pure-play water technologies company. The other global water giants, VEOLIA & Ecolab are not classified as pure-play water-tech companies.

Grundfos, with revenues of 4,2 billion USD in 2021 is regarded as the second largest water technology company globally. Like Xylem, Grundfos is a global leader in the water pumps business but diversified its portfolio in the past years. The acquisition does not only widen the gap between Xylem and Grundfos in terms of revenue, but it also further diversifies Xylem's product portfolio from its competitor.

The strong geographic focus on the US might harm Xylem’s market position and growth outlook in other world regions, as it is expected that organic growth initiatives might suffer from the capital-intensive acquisition. The Evoqua acquisition further completes Xylem’s portfolio, which already built up a stronghold in the analytics segment through the Sensus acquisition in 2016. At present, we do not identify any major external threat to Xylem's future success in the water market.

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