By Jack Lee, Heather Leung and Sissi Zeng (HKUST), Rhys Meredith, Kian Patel, Oliver Platts, Samuel McCrea, Velizar Zlatev and Salah Baaziz (University of Bristol)
Photo: Claire Fischer (Unsplash)
Overview of the deal
Acquirer: Xylem Inc.
Target: Evoqua Water Technologies Corp.
Implied Equity Value: $6.7bn
Total Transaction Size: $7.5bn
Expected closed date: Mid-2023
Target advisor: Goldman Sachs & Co. LLC, Bank of America (Financial), Jones Day (Legal)
Acquirer advisor: Lazard, Guggenheim Partners, LLC (Financial), Gibson, Dunn & Crutcher LLP (Legal)
Xylem Inc, the listed United States-based plumbing fixture manufacturer, is to acquire Evoqua Water Technologies Corp, the listed local provider of water and wastewater treatment products and services. The consideration was $6.7bn, based on an exchange ratio of 0.480 shares of Xylem for each Evoqua share, representing a stock offer price of $52.89 per share, based on the one-day prior share price of Xylem.
Building on Xylem’s global leadership in water solutions and Evoqua’s leadership in advanced treatment solutions and services, the combined company will be uniquely positioned to develop and deliver an even more comprehensive offering of innovative solutions. Moreover, the combination unlocks compelling new growth opportunities and is expected to deliver run-rate cost synergies of $140m within three years, driven by scale efficiencies in procurement, network optimisation and corporate costs.
"Solving the world’s water challenges has never been more urgent. Our acquisition of Evoqua creates a transformative global platform to address water scarcity, affordability and resilience” - Patrick Decker, President and CEO (Xylem Inc.)
Company Details (Acquirer - Xylem Inc.)
Xylem Inc. (Xylem) is a water technology company. It designs and manufactures engineered products and solutions across a wide range of critical applications. The company addresses customer needs across the water cycle, from the delivery, measurement and use of drinking water to the collection, test and treatment of wastewater to the return of water to the environment.
Founded in 2011, headquartered in Rye Brook, New York, the US
CEO: Patrick K. Decker
Number of employees: 17,000
Market Cap: $18.5bn (as of 07/03/2023)
LTM Revenue: $5.5bn
LTM EBITDA: $741m
LTM EV/Revenue: 3.5x
LTM EV/EBITDA: 26.8x
Recent Transactions: $397mn acquisition of Pure Technologies Ltd (Dec 2017); $1.7bn acquisition of Sensus (Aug 2016); $18mn acquisition of Hypack (Nov 2015)
Company Details (Target - Evoqua Water Tech Corp.)
Evoqua Water Technologies Corp. is a global leader in providing water treatment solutions for clients in a variety of industries, from industrial to municipal to commercial. The company offers a comprehensive range of products and services. Two of its strongest segments are Integrated Solutions and Services (ISS), which provides application-specific solutions to life-cycle services to process water, and its Applied Product Technologies, which sells a plethora of products including filtration, separation and disinfection for water systems.
Founded in 2013, headquartered in Pittsburgh, Pennsylvania
CEO: Ron Keating
Number of employees: 4,500
Market Cap: $5.8bn (as of 12/03/2023)
LTM Revenue: $1.8bn
LTM EBITDA: $245mn
LTM EV/Revenue: 3.7x
LTM EV/EBITDA: 26.8x
Recent Transactions: Acquisition of Epicor Ltd (Jul 2022)
Projections and Assumptions
The acquisition of Evoqua aims to address critical markets, particularly industrial water, and to innovate with digital solutions. With increasing momentum in water investment , Xylem is optimistic about achieving mid-single digit growth for 2023 and expanding margins to reach long-term growth goals. This is reinforced by forecasts of $7bn in combined revenue within the first 12 months of the deal.
As part of the acquisition, Evoqua has also agreed to sell its carbon reactivation and slurry operations to DESOTEC, a leading European provider of activated carbon technology-based mobile filtration solutions. The deal, expected to be completed by the end of Evoqua's Q3 of fiscal 2023, includes the product line's employees, facilities, and equipment in Pennsylvania, Arizona, and California. The transaction is expected to generate approximately $100 million in gross proceeds.
Two Evoqua directors are expected to join the Xylem board, and Evoqua shareholders will own approximately 25% of the combined company. Since the announcement, Evoqua's share price has risen by approximately 14%, with the deal representing a 30% premium on the initial share price. Xylem remains dedicated to meeting commitments to stakeholders and ensuring a seamless integration until the transaction is finalised. In summary, the combination is well-positioned to address critical markets and innovate with digital solutions to increase access to safe and sustainable water. It is expected to create significant synergies and cash flow, supporting continued strategic growth and investment.
The acquisition will result in synergies between the companies via two streams: improved operational efficiencies and cost saving through shared resources. As previously mentioned, the acquisition will drive run-rate cost synergies of $140m within three years. The combined company can deliver a portfolio of advanced technologies, integrated services, and application expertise across the water cycle. As well as cost savings, there is room for large-scale innovation to create both value and tackle challenging needs for consumers and communities. From a geographic perspective, there is scope for Xylem to implement Evoqua’s technologies worldwide. Currently Evoqua has a strong presence in North America, whilst Xylem has a global footprint. By combining their resources, these technologies can reach customers in new markets around the world.
The market growth for the acquisition is promising, the global population is growing, and with it, the demand for clean water is increasing. The United Nations estimates that global water demand will exceed supply by 40% by 2030, which is expected to drive demand for water technology solutions. Alongside increasing demand for services, there is a growing focus on sustainability and environmental responsibility. This is driving demand for water technologies that can help reduce water consumption, energy use, and carbon emissions. The acquisition provides Xylem with capabilities to tackle new problems in the industry, whilst benefiting from synergies that can realise lower costs and more innovative solutions.
Risks and Uncertainties
News of the $7.5bn stock-for-stock deal sent Xylem stock prices tumbling by more than 8%, indicating that the market considers its valuation of Evoqua excessive. At 22x of its FY23E EBITDA, almost double that of what the S&P 500 trades at (approx. 12x), the implied equity value of Evoqua suggests significant ownership dilution and synergy risks to be borne by shareholders. It should be noted, however, that the plunge in price was partially driven by a reasonable dose of investor pessimism plaguing recent quarters and merger arbitrageurs (short acquirer to buy target) seeking to capture the deal spread, thus one may argue there is still considerable likelihood that the deal will go through; minimal overlap in the two businesses’ operations, and thereby little expected antitrust resistance further substantiates this.
Indeed, though Xylem’s offer far exceeds its $2.5nn bid in 2017 (rejected by AEA Investors LP, Evoqua’s majority owner), given the firm’s successful pursuit of long-term growth via an M&A strategy and the repeated outperformance of S&P 500 Global Water Index over the S&P 500 and MSCI ACWI indexes, an addition of the world’s global pure-play water company to Xylem’s portfolio appears promising in the long term.
“Together with Xylem, we will drive innovation on a larger scale for our customers, positioning us to create even more value for our stakeholders” - Ron Keating, President and CEO (Evoqua)