By Nathan Gomes, Isla Binnie and David Carnevali
-Water technology company Xylem Inc on Monday agreed to buy Evoqua Water Technologies Corp in a $7.5 billion all-stock deal, aiming to tap into growing global awareness of risks around water scarcity.
Evoqua shareholders will receive 0.480 new Xylem shares for each Evoqua share they own, representing a premium of about 29% based on Friday’s closing prices.
Shares in Xylem, which provides water and waste water treatment services, closed down nearly 8% on Monday after recouping some earlier losses, as investors disapproved of the hefty price tag.
Evoqua’s wastewater management business has enjoyed broad demand from most of its operations in recent months, but the purchase price – which reaches $7.5 billion including debt – spooked investors, CFRA analyst Jonathan Sakraida said.
While it is not unusual for stock prices of buyers to face pressure from investors after the announcement of sizable transactions, the rising cost of capital and broader macroeconomic uncertainty of recent quarters has made Wall Street investors even more risk-averse to deals than usual, making it harder to execute mergers successfully.
For instance, Emerson Electric’s shares have been punished by investors since the industrial conglomerate unveiled an all-cash hostile takeover bid for National Instruments Corp earlier in January.
Explaining the outlay, Xylem executives told analysts on a conference call they expected the deal to generate cost synergies of about $140 million within three years. Xylem shareholders will control roughly 75% of the combined company after the deal closes.
“Clearly there is upside, both in cost but mainly revenue,” Xylem Chief Executive Patrick Decker told Reuters, adding the companies had not yet committed to revenue targets.
Demand for fresh water is rising globally due to population growth, industrial expansion and increased agricultural development. Policymakers and business leaders are backing global initiatives to help secure supply.
“When you think about what’s going on around water infrastructure, the issues of scarcity, resilience, affordability … it’s the right time for us to be together,” said Decker, who will stay on to lead the combined company. Evoqua CEO Ronald Keating is expected to step down after the deal closes, according to a person familiar with the matter.
With the acquisition, Xylem will have a bigger presence in businesses capable of generating recurring revenue such as water services, according to a company presentation.
Pittsburgh, Pennsylvania-based Evoqua serves industrial, municipal and recreational customers in nine countries.
Xylem had previously approached Evoqua with an acquisition offer worth $2.5 billion, before the latter chose to float its shares through an initial public offering (IPO) in 2017. Evoqua also received acquisition interest from other potential buyers before agreeing to a deal with Xylem, the source cited above said.
The deal is also expected to expand Evoqua internationally.
Lazard and Guggenheim Securities acted as financial advisers to Xylem, while Gibson, Dunn & Crutcher LLP was its legal adviser. Goldman Sachs, Bank of America and law firm Jones Day advised Evoqua on the sale.