The recent announcement of Xylem’s agreement to acquire Evoqua was significant news for the municipal water/wastewater utility sector.
According to Xylem, the $7.5 billion deal will help the combined company achieve a global reach in a range of water-related markets. The company will be led by Xylem President and CEO Patrick Decker and is expected to have an annual revenue of more than $7 billion with more than 22,000 employees.
In the municipal water utility space, Xylem is active in a number of business segments ranging from water distribution, wastewater collection, water/wastewater treatment and process equipment, water reuse, sustainability and data analytics. Notably, the company acquired metering company Sensus in 2016 for $1.7 billion in cash.
To get some more insight on the recent Evoqua transaction, what it means for the municipal sector and how it could affect utilities downstream, we chatted with Alexander Loucopoulos, partner at Sciens Water, a private equity firm that invests in companies in the water and wastewater industries. Loucopoulos has more than 12 years of experience establishing various real assets funds in markets including water, aviation, maritime, energy infrastructure and real estate.
WF&M: In your view, what does Xylem’s acquisition of Evoqua mean for the water sector in terms of the landscape for manufacturers/vendors/suppliers? Does this acquisition represent any trends you’re seeing in M&A activity in the waterworks sector?
Alex Loucopoulos: Overall, this acquisition highlights both the growth in the U.S. water sector, as well as its relevance in the current macro environment we are operating in.
Each and every day we are learning about new water issues, and I believe companies like Xylem and Evoqua are at the forefront of providing solutions for many of the larger scale problems. A combined Xylem and Evoqua will provide a more robust suite of products and services to their core customer markets.
Given how few large water companies there are in the United States, I don’t see much more consolidation at this scale, however, I do see an urgency and a continued trend for M&A at the lower and middle market.
WF&M: How might this acquisition benefit the sector? How might utilities be affected?
AL: By creating the world’s second largest water company and one that is based in the U.S., I think the overall sector will benefit and many of the best practices, particularly on the technology and operations side, will now be applied on a global scale.
The larger utilities will benefit from the scale and expanded offering this merger brings.
WF&M: You mentioned these are two of only a handful of scalable U.S. water companies. Does this leave a void for the lower and middle market?
AL: In my view, the water market, as it is defined by many, is very broad and spans many different industries and sectors. It is also one of the most fragmented and local, from the 85,000 water and wastewater utilities in the United States, to the thousands of treatment solutions and infrastructure services providers. This fragmentation makes it difficult to understand and also difficult to finance.
This merger creates a multibillion-dollar business that further adds to the concentration at the top end, while leaving the lower and middle parts of the market still incredibly fragmented. There is still a lot more consolidation that needs to happen. Unless these other parts of the market are also consolidated and national leading platforms evolve, many of the water problems we face today will persist.
WF&M: The water sector reacted favorably to the passage of the 2021 Infrastructure Investment & Jobs Act and to other federal funding coming into the sector. In addition, recent high-profile water incidents (Flint, Mich., Jackson, Miss.) seem to have elevated the importance of water management in the public view. With some of this in mind, will we in fact see utilities increase investment in new technologies and processes to bolster resilience? What is your financial outlook for the sector right now?
AL: The need for investment capital and technological advancements in the U.S. water space is massive. All the federal funding will certainly help, but there is a lot more capital that is needed to go into this sector. We also need to bring in new leaders and companies that will add technology and improve operations.
We are still in the early stages of a long-term super cycle in water investment. It is my hope that leaders like Patrick Decker at Xylem and others focused specifically in the lower and middle markets will continue to solve many of the water problems that exist in this country today, as they are all solvable.
