BY ANTONY CURRIE
A Franco-Dutch utility deal is stirring up U.S. M&A waters. Suez is selling a fifth of its regulated business in the northeastern United States to pension manager PGGM for 30 times last year’s earnings. The $601 million transaction looks even pricier than the takeover battles currently being waged for two other water companies.
San Jose, California-based SJW Group’s agreed tie-up with Connecticut Water Service, worth $750 million when announced in March, does come in at the same multiple. But SJW is taking full control of its target. So all else being equal, investors could expect to get a premium relative to what PGGM is paying for a minority stake.
Shareholders in SJW may have reason to feel aggrieved, too. California Water Service piped in a $1.4 billion all-cash offer for its local rival in April. That works out to almost 24 times 2017 earnings. Just matching the Suez multiple would add another $375 million to SJW’s market value. Pour in a 30 percent takeover premium and investors could in theory demand $2.3 billion.
The Suez price is even more striking considering that the company is selling a chunk of its U.S. utility business to reduce leverage from last year’s acquisition of GE Water, an industrial business. That implies PGGM might have had the upper hand in negotiations.
Yet the comparisons muddy the underlying picture, which is that all the current offers look fully priced, if not verging on the excessive. The handful of publicly traded water utilities in the United States are expected to grow the bottom line by a decent 5 percent or more a year, according to Eikon data. But regulators determine how much these firms can charge customers, thus limiting returns on equity to around 10 percent.
Scarcity is playing a role in valuations. There are fewer than 10 listed U.S. water utilities, most of them worth less than $1 billion. So it doesn’t take much extra interest from investors – or rivals – to push up prices. Trouble is, with earnings power limited by regulators, overly exuberant buyers risk ending up high and dry.
First published July 31, 2018
IMAGE: REUTERS/Pascal Rossignol