BY ANTONY CURRIE
A $1.7 billion water merger is piping in a refreshing M&A taste. Xylem’s purchase of Sensus, revealed on Monday, will end the smart-metering specialist’s tenure as one of private equity’s longest-held investments. And unlike in some mergers, there’s no scarcity of logic behind Xylem’s investment.
The price, for one thing, looks right. The water-related technology outfit is paying 10.7 times adjusted earnings before interest, taxes, depreciation and amortization for Sensus. Some $50 million of expected cost cuts should reduce that to just 8.1 times once they are realized, way below Xylem’s own multiple of 14 and much lower also than publicly traded rival Badge Meter, which trades at 15 times EBITDA.
There’s scope for decent growth from putting the two companies together. In theory, that’s the case for a lot of mergers in general, and perhaps especially those involving water-focused companies. Population growth and rising relative wealth are boosting demand for water, meaning the smart management of supply and use – affected in large parts of the world by drought, flooding or both – is critical. Every player, from industrial users to municipal water and wastewater utilities need to up their game.
Xylem Chief Executive Patrick Decker is controlling the flow more effectively than many, though. While he reckons the two companies could add perhaps $100 million in annual revenue, he’s not using that as an excuse to overpay.
The Sensus deal also fits cleanly with the strategy he has espoused since taking the helm two-and-a-half years ago, including requiring deals to meet specific financial targets. It’s simple stuff, but it’s often ignored in favor of grand, general statements. Buying a private company with units abroad will also allows Xylem to use $400 million of overseas cash.
Decker also seems to have done, well, watertight due diligence. His team, for example, interviewed “a three-digit” number of Sensus’ customers. That not only helps gauge how much extra business there might be from a tie-up. It also surely gives a better sense of how the target company works and whether the two cultures will fit.
The deal finally allows Sensus owners Jordan and Goldman Sachs to offload a company they bought in 2003. Poor results forced them to bring in new management a decade later. Given that, their 7 percent annualized return looks palatable. But Xylem is the one with its glass now brimming.
First published Aug. 15, 2016
IMAGE: REUTERS/Regis Duvignau/Photo Illustration