Mergers And Acquisitions In Water: 2014 Year In Review
By Ted Polk, Capstone Partners LLC
Merger and acquisition activity has been very robust, both in terms of the number of deals and cumulative transaction value. In fact, 2014 was one of the best years on record and proof positive that the market has completely recovered from the financial meltdown of 2009. Preliminary figures show the number of U.S. transactions increased nearly 8 percent in 2014 to over 16,700. The positive environment is providing a unique opportunity for private business owners in the water sector to exit their business or team up with a growth partner.
The increase in activity can primarily be ascribed to buyers’ improved confidence in the economy and their optimism regarding better business conditions ahead. This newfound assurance is built upon, in part, a run-up in corporate stock prices, which in turn has provided both more cash and richer currency (stock) for acquisitions. As a result, corporate buyers are now in the midst of an acquisition spree, searching for targets that can help boost their revenues and profit while satisfying other strategic initiatives, such as providing access to new products, new technologies, and new end-user or geographic markets. Such was the case in a transaction that Capstone Partners recently advised on – the sale of privately-owned Wachs Water Services to Pure Technologies Ltd. (TSX: PUR). Wachs Water Services is a leading provider of water and wastewater system assessment solutions that improve system efficiency and asset management. The transaction will satisfy several strategic initiatives for the buyer. It will diversify Pure’s business in the U.S., broaden its client base especially in the small- and medium-sized utility space, and provide complementary revenue streams in related pipeline management activities. Because middle-market companies are the primary driver of economic activity in the U.S., they remain a key target, in many cases attracting intense buyer competition and multiples typically reserved for larger transactions.
Such strategically motivated buyers are being encouraged by excellent market conditions that include low interest rates and excess cash on their balance sheets. The combination of cash, inexpensive debt financing and inflated stock prices means that buyers have an abundance of currency for transactions. At the same time, they are feeling pressure from investors to put that money to work. With an acquisition often being the quickest way to produce results for investors, M&A activity is on the rise.
Backed by these positive market conditions, U.S. corporate acquirers are currently the most active and making the strongest moves with regards to interest and price. Foreign strategic acquirers have also become more aggressive in the U.S. market, as their local economies begin to improve as well. Private equity firms are also holding strong. Private equity deal activity, by both volume and value, was historically high in 2014 despite expensive valuations and strong competition from strategic buyers. Private equity firms have record levels of dry powder available to invest and ready access to inexpensive debt and they are generally optimistic about the U.S. economy, making them active bidders on many transactions. For a list of recent transactions and buyer activity in the industry, see our latest Market Report here.
2015 Outlook
Capstone expects more of the same in 2015 – strong middle market activity driven by eager, well-capitalized buyers and backed by a growing economy. While a potential interest rate hike could put a damper on deal activity and impact valuations, or a market correction could impede momentum, we expect that 2015 will yield excellent opportunities for privately held middle market companies. In fact, the M&A cycle appears to be entering its “boom” phase, during which activity – and valuation premiums – often rise sharply. The deal closing pace is also picking up, with the due diligence and documentation timeline finally becoming more accelerated. The end result is a very attractive seller’s market.
Ted Polk is Managing Director and head of the Infrastructure practice at Capstone Partners LLC, an award-winning investment banking firm dedicated to helping business owners maximize the value of their business via a sale, recapitalization or growth financing. For more information on M&A activity in the Water industry, or to receive Capstone’s complimentary bi-annual newsletter that discusses valuation trends and outlines M&A transactions in the industry, contact Ted at tpolk@capstonellc.com or 312/674-4531.