BY ANTONY CURRIE

The $1.9 billion deal for Israel’s Netafim is a glass half full. Mexichem leaked more than $220 million in value after announcing its acquisition of an 80 percent stake in the drip-irrigation pioneer from buyout firm Permira and its kibbutz backers. There are plenty of opportunities yet to tap, though.

The Mexican pipemaker is paying around 14 times the $136 million of earnings before interest, taxes, depreciation and amortization it reckons Netafim will generate this year. By comparison, Xylem last summer paid nearly 11 times EBITDA for Sensus, while Suez valued GE Water at a multiple of 12.5 times earlier this year.

Netafim is one of the most prized assets in the industry, however. It developed a method of channeling pipes directly to plant roots. Sensors and other technology have made the process even more efficient.

This drip- or micro-irrigation not only saves water but also can produce crop yields between 30 percent and 100 percent higher than flood irrigation. That has been a boon for the Israeli farming industry. It has to cope with a limited supply of water in a region prone to drought and mired in interstate conflict that has made importing food from a relatively water-rich neighbor like Lebanon impossible.

Operating in more than 110 countries, Netafim is the leader in drip irrigation, controlling around a third of the global market. The method is used on just 5 percent of the world’s irrigated farmland; flooding still predominates, with a 77 percent share.

That’s unsustainable, however. The world’s population is due to hit 9.8 billion by 2050, almost a third higher than today, according to U.N. estimates. That may require a 50 percent increase in food production, as people in successfully developing countries change their diets. Yet on current usage there may be a 40 percent gap between water supply – 70 percent of which is already used for agriculture – and demand by 2030.

Firms like Netafim are well placed to address such challenges. It is still growing in India and just getting started in China, where water pollution is another big issue. Longer-term that means Netafim should easily be able to fill its new owner’s coffers.

First published Aug. 7, 2017

IMAGE: REUTERS/Amir Cohen