BY ANTONY CURRIE

Suez’s pricey acquisition from General Electric just about holds water. The French company and its minority partner, Caisse de depot et placement du Quebec, are paying $3.4 billion for the U.S. conglomerate’s H2O unit. That looks high, but it doesn’t mean the deal is a washout for shareholders.

The headline price works out to a frothy 12.5 times GE Water and Process Technologies’ earnings before interest, taxes, depreciation and amortization. That’s a good chunk more than the 10.7 times EBITDA Xylem paid for Sensus last year. Worse, that target was a more profitable company, sporting a 19 percent EBITDA margin, whereas the GE division’s 13 percent margin is one of the industry’s lowest.

That ought to have merited a lower price. There was plenty of competition for the business, though, from rival operators like Honeywell and Pentair as well as from private equity. Suez is also paying for scale, which may seem strange considering its $15 billion of revenue last year was seven times that of GE Water’s.

But the deal vaults Suez from 10th largest in industrial water into third place. The 95 billion euro market is one of the more lucrative segments of the water business as companies seek to upgrade their infrastructure to save water and energy. It’s also expected to grow around 5 percent a year. That’s faster than the municipal market that currently makes up much of Suez’s business – and the reason why its revenue growth is almost flat.

Municipalities remain a potential cash cow. Many around the world need to either build or replace their pipes and sewer systems – once political will and economic reality allows. But industry is a bigger market, accounting for as much as a fifth of global water consumption compared with up to 8 percent by humans in cities.

Suez also reckons it can cut $69 million a year of costs, which brings the acquisition multiple down to 10 times EBITDA. Promised revenue synergies, as flighty as they often are, look less impressive: at $200 million a year, they’d add just $26 million to EBITDA, on GE’s margin. Luckily, the bigger picture for water should be enough to make this deal flow.

First published March 8, 2017

IMAGE: REUTERS/Vincent Kessler