Private Equity Adds Water Treatment Chemicals to Their Playbook

There's some concern that if there's enough disruptions, then utilities may just simply not get the chemicals they need and it doesn't at that point really matter what the price is. I'm Rhys Düssel and this is Future Water, which we talk about all the ways which companies, utilities and people are addressing the challenges and opportunities in water. Welcome to episode 102 of the Future Water Podcast and I know it's going to be a good one. That's because today I'm joined by Bluefield Research is Ethan Edwards and Ethan senior analyst of Bluefield's been doing some in-depth analysis of M&A trends as well as industrial markets and for this conversation. We talk about his recent insights into TJC's acquisition of US Alco, which is a chemical company with a focus on the water waste water sectors. Ethan and I in the conversation we're going to talk about private equities role in the chemical sector and upcoming IPO or two that we see on the horizon within the space. Also, we talk a little bit about approaches to recent supply chain constraints and how these companies are building in resiliency into their capabilities to address the challenges and once again opportunities going forward. It's going to be a good conversation with Ethan, but before we do that you're going to have to bear with me for a minute and let me talk about what's caught my attention recently and what I say bear with me that's because this time I have two items. The reason for that is because I woke up early this morning to news from our European office that in the core a diversified private equity backed industrial company has acquired a borrow from FFL partners. So UK based of our offers a range of specific technologies and solutions tailored for the water sector, which we have bluefield we know fair man about we've done a lot of work with a borrow. We know a lot about the company its markets and where it's going, but I think you know it's offerings include everything from telemetry and skater systems. League detection including of our is permanent eurica three products it has our pressure management application. I know is used for optimizing pressure levels across water networks preventing bursts and extending asset life addressing things like non revenue water. It also has event management and analytics solutions as well as remote asset management tools. But why do we really care about this other than the fact that it's a borrow well let me start with in the core was formed in 2023. Not a lot of people know about in the core and the reason for that is like I said it was just formed in 2023 following the sale of a majority stake in a portfolio of industrial businesses from roper technologies. So roper technologies sold the majority stake to Clayton Dewey and rice which is private equity firm and CD and R is all called them now holds a controlling interest in in the core with I believe the roper technology is still holding a minority stake. The roper technologies for what it's worth they also Neptune technologies the metering company which some of you may have heard of so I thought this is really interesting also CD and R they were prior owner of corn main so they're interesting to see what CD and R will do with this business to that point. Varro seems to be adding to in the core stack of related solutions in the core also owns technology which seems to have I don't know if it's direct or overlapping offerings with a borrow so in the core seems to be doubling down on some respects. Technolog has references all over the world from South Africa to Ecuador to the US so it'll be interesting to see how that plays out which is the segue to my third point that is of our strength is in the UK market clearly in a course looking to apply of our solutions to other markets including the US I would imagine so it'll be interesting to see how that plays out. Nonetheless it's worth continuing look at the UK market I want to give a shout out to my colleague Chloe Meyer who not only just released a report on the UK market and what's happening in that geography but also. Give a shout out to her because she was on the last future water podcast episode 101 and which we do talk about the UK market so you want to get the bridge version over your phone and through a podcast go back to episode 101 so in other news sort of changing gears a little bit but perhaps could follow up to the in the core of our deal and that is. Newfield has just released its US digital water forecast US and Canada digital water market outlook this includes everything from key drivers competitive shifts was forecast out to 2023 cross apologies for not knowing the exact number 20 or 30 different segments within the digital water space across the US state by state US and Canada that is but really watch it the water industry care watch it you care hopefully it's because. Because the digital water market North America's on track more than double from 11 and a half billion in 2024 to almost 24 billion in 2023 this is going to be driven by push for more efficient data driven infrastructure behind that so I think over the course that forecast period we're looking at about. 8.5% compound annual growth rate and it's going to look at towards going to be driven by things like smart meters skater systems and AI powered analytics among other things another reason why it's of note is emerging technologies and cybersecurity cloud based platforms like AI and machine learning it seemed to be transforming data handling predictive maintenance and asset management within utilities. But with increased digital integration cybersecurity risks are going to be a lot higher and I think everybody sees that coming down the pipe pun intended utilities water wastewater utilities are expected to invest heavily in the security was spending on cybersecurity projected to grow. 7 7.5% to the forecast period now it's growing from a pretty small base so let's be honest here but. It is a topic for sure and it is a real threat it's only a cybersecurity raises a lot of red flags are alarms for utilities in their procurement decisions when it comes to technology so definitely something to think about and to consider. Another area of note within the report that our team of digital analyst take a look at and that is workforce challenges accelerating adoption so of digital technology so with workforce shortages. Calls by high retirement rates there's been a difficulty in attracting new talent to utilities and operations utilities are in some respect turning to digital solutions to solve their problems this includes everything from automation remote monitoring and other data driven systems that. Really becoming essential the shift not only fills a gap of you know workforce gap but it's also driving a fundamental transformation making digital technology adoption partly survival strategy in some cases this is one of the ongoing challenges but I think even within the workforce itself by adopting these. Digital solutions it also transform the type of hiring that's going to have to take place at utilities going forth they're going to have to be least within the back office more data driven technology focused data management focused then they have been in the past. I think my last point among others that I wanted to share I've got a long list here but I'm going to cut it short for the second time and that is the rise of SAS and subscription models the shift from capital heavy investments to subscription based models like software is a service it's also transforming the way utilities are managing their assets and operations SAS models ideally reduce upfront costs particularly benefiting smaller utilities and allowing them. To implement advanced digital tools that otherwise might be out of reach partly because of once again workforce personnel and resources available to them but also the upfront capital that's going to be required so it'll be interesting to see how this unfolds their number of different companies their different approaches should I say that are being deployed by these companies to target you know the big utilities everybody can go well hunting for the big. 100,000 population served and more but then there's hands of tens of thousands of water and wastewater utilities to serve much smaller populations that are in many ways and greater need for support they have less employees have less capital available to them this is not a knock they're less sophisticated financially and how they're dealing with things so they're going based off experience so if people and there are companies out there that are targeting the segment the tier three four and five systems out there that there's a huge opportunity for improvement and they are probably the most exposed to risk whether that be regulatory risk whether that be technology risk whether that be infrastructure risk or some cases climate risk I could go on and on about the support it's a good one if you're interested in it feel free to visit with It's right there on our website, you can buy it off the shelf, you can also just go to our contact page and reach out to us and perhaps we can set up a conversation and see how we can help you see what you're looking for and address some of your questions. So two good things to talk about this week. In the core bias of RO and Bluefield Research is recently released, just recently released digital water forecast over the next decade. So give us a ring if you're interested. That being said, let's get to Ethan Edwards and talk a little bit about M&A in the chemical sector. All right, so I'm joined here by Ethan Edwards. Ethan, how goes it? Pretty good. It's the start of fall in Boston, so there's a lot of excitement that comes with that. Well, we were just talking about it before we started recording. You've got a marathon coming up in about a month, but as you said, I'll use your words exactly. Sadly, quote unquote, you've done enough of these as the logistics and the planning aren't what they used to be, but you still do them. So good on you, I suppose. Yeah, not as much as there used to be, but I guess there's still enough adrenaline and still enough of a high in the race that keeps me coming back. Well, I guess best of luck to you. I'm not going to, it's too late for me to start running marathons at this point, but that being said, you've been doing some research, put some together on TJC's recent acquisition of US Alco. So why don't we just start with the basics, like we do often, and that is let's talk about this, it's significant since sort of the broader water treatment chemicals market and give us a little bit of the detail. Yeah, so this deal happened last month from the time that we're recording this podcast on August 5th, 2024. And it is the biggest deal that we've seen so far in the water sector. So TJC, they filled USALCO to HIV capital for an estimated $2 billion. And USALCO, they're bought to more Maryland based. They manufacture and they distribute water treatment chemicals, primarily coagulants and flocculants to municipal utilities. So those are chemicals that are used to filter out suspended particles from surface water. So anything where you're pulling water from rivers, lakes, reservoirs, that's what they're using in one of the treatment steps. And so both private equity firms, they've bought and sold companies between the two of them before, and they're both active in the water market. So HIG capital, they have their own united flow technologies water platform. And then TJC in the past, they've owned census first, buying in in 2003 and selling nearly 13 years later in 2016 as island for around three times what they bought it for after adding a couple acquisitions in. Yeah, I think the, I mean, that I didn't even realize that the the TJC owned census or if I did, I forgot about it. It's one, it's been a while and now in my mind, it's been a while since silent picked it up. So that's actually pretty interesting. But I think to your point, this is a $2 billion deal. And by that, you mean, it's the biggest deal we've seen this year. I don't even know if we saw one that big even last year. There's been, there was a bit of a wave of big deals a year or two ago and just M&A as a whole has been down, but hopefully or seemingly it looks to be picking up. But U.S. Alco, when we talk about them, its growth, speaking of acquisitions, it's been driven largely by acquisitions since they picked it up in 2020. So how is that strategy shaped the company's footprint, I guess in the U.S. primarily, particularly in water and wastewater? Yeah, I mean, we've kept an eye on them since they've been acquired. And when the acquisition was announced, I think that was one of the main things that stood out to us was just in addition to their massive deal size biggest this year, essentially, was also just their growth under HIG over the last four years. So I think HIG had bought in essentially in June 2020 and then under their backing, as you could say, they essentially triple their manufacturing and distribution facility footprint in the U.S. and then really went from being a regional player used to the Mississippi to a national player. So looking at some of the different deals that they did at that time, I would say the most transformative move was in merger in 2021 with G2O technologies, which added around 15 facilities to U.S. Alco. And looking at the landscape now, looking at the top 10, U.S. Alco roughly fits in that fourth spot in terms of the besides distribution scale of their locations behind Salinas, the market leader, which is owned by platinum equity Hawkins, which is publicly traded and then universe solutions, which is also private equity owned by Apollo. And it looks like they're still growing. They've announced a couple new production plants in California and Arkansas as well. Yeah, I think it's interesting when you look at the other companies you mentioned, Salinas and Univar specifically, they're owned by private equity. So let's talk a little bit about private equity in the role of PE firms in this space. You know, so we'll talk about TJC and HIG. What is the role that private equity is played in consolidating water treatment chemicals market and why is this consolidation happening? Seems to be a pretty good clip. So yeah, what's the role they're playing? Yeah, well, if you look at private equity firms in water in general, there's definitely interest in getting in if they're not already in. Oftentimes, it's a pretty similar playbook buying into a growing space, buying and rolling up companies and then exiting, hopefully at a higher valuation than they bought in for. But when we zoom in on the water treatment chemical space specifically, I would say it's a little bit more nuanced because it's arguably not growing as fast as some of these other more mercurial growth segments or verticals that we're talking about. So we have it as a $7 billion market in the US that's growing a little under 2% a year. And so there's some limited growth expectations there. Arguably, it's a high floor in that these chemicals are always going to be needed at municipalities and industrial facility sites, but a low ceiling in some ways with the growth. And so you still go in particular. They also have significant exposure to municipal treatment sites instead of industrial. So that also potentially could weigh on that growth expectation. So that's the backdrop. And then I would say that it becomes clear with that limited growth that the growth is really coming in organically, whether it's buying competitive or buying competitor companies or building new production facilities. That's sort of the capital to grow the valuation. And when we look across the top 10 players in the space, pretty much every private equity back chemical manufacturer has grown in organically in terms of rolling up the space, consolidating the space faster than their publicly traded peers over the last four years. And when we look at the competitors, the one exception is Hawkins, which has completed 11 acquisitions. But when you look at the others, I think we start to see that there are potentially different priorities there. A lot of them are diversified players, like Veoli and EcoLab that do water treatment chemicals, but do a whole bunch of other things in the water space as well. So maybe their priorities aren't there. Yeah, I thought one of the, I mean, you touched upon something about sort of the growth. I mean, as we all know, the water waste water sectors are pretty mature, well established. So, you know, I know one would think the private equity is looking for some uplift because they're going to get in the deal and then out of it at some point in say five, seven years. Then the other thing is just there's a little bit of nuance we've also seen is there's slight difference between maybe you're touching upon this, the industrial sector, which also has demand for chemicals as well versus the municipal side. And so, you know, I know some of these chemical companies they play in both. And, you know, some are weighted more in one direction or the other. So I think that's something worth looking at or understanding at least so interesting. Appreciate you bringing that up. The other thing that's also been happening over the past couple years apart from COVID and just the craziness and, you know, there are inflation and market or supply chain disruptions that are impacting chemicals. I remember having conversation with it's on a panel with a CEO of I think with, with essential utilities. And we were talking about challenges that they were facing a couple of years ago at least. And one of the things that came up was chemical, a chemical prices for water, wastewater treatment were through the roof. And they were causing all sorts of operation and all or op-ax pressures on the utility, essential utilities in aqua-american. So they've got a bigger footprint than just one state or one utility at that. So, cost arising and it seems I think our numbers show that chemical costs are still 27% above pre-pandemic levels. So, how are these chemical producers managing those ongoing cost pressures? What are they doing? And is there anything that they could do differently or that these, even these private equity companies are doing to get bolster profitability? Yeah, I mean, it's a good point on the cost and I would point out that it's really not just Price is in general. There's just an overall concern about supply chain security The AWWA has looked at in the last couple of years looking at how vulnerable are water utilities in the United States to supply chain Disruptions whether it's from trucking or rail or Overseas fright potentially. There's some concern that if there's enough disruptions then Utilities may just simply not get the chemicals they need and it doesn't at that point really matter what the price is but Looking at the cost, which is Ultimately what the producers and manufacturers are more in control of I would say that the key is in scale. So Scale can help them drive down costs and then manage market disruptions where they can so In certain scenarios, it's out of their control you salco, for example, they're Baltimore headquartered and then this year in March 2024 totally out of their control They saw the Baltimore Francis Scott Keybridge collapse and With the manufacturing and headquarters there. That's definitely impacted their logistics Especially in that Eastern seaboard area So you've just got general uncertain market conditions and then you're trying to sell to a highly risk averse utility consumer base. So managing All those challenges through scale And just service quality overall is what they're targeting. It seems like also I mean these acquisitions like you said There also I think the word you were talking about resilience supply chains I think one part of that also is you can also put a pen in a map and is there like a Radius that you can draw around so for distribution channels to various customers It seems like that's what these the positive companies are doing at least So I think you've put out a footprint. How many how many manufacturing facilities do we have on the map? We try it for chemical companies. We put it together in research. I don't remember For coagulants and flocculants. I believe it's around 200 total have to read the research note. There's a figure on it But you suck. Oh, they have around 33 and it's definitely important. I mean the cost of shipping these Heavy chemicals since they're usually in a liquid form. It's pretty high So I think they say there's around a 300 to 500 mile radius that You can reasonably do it from the manufacturing to distribution site to end user Yeah, and I know that our team on the consulting side We've been working with some companies talking about chlorine right the actually the Not just environmental risk, but the Human or community risk to moving chlorine around the country and tanks whether beyond trucks or or rail And what that potentially means so there are other technologies that are trying to hit that market niche If you want to call out that in offer different solutions that are less risky So looking forward What can we expect from the chemical sector going forward and are we going to see more deal flow? What are your expectations? I would expect so so looking at this segment in particular before we zoom out just The treatment chemicals coagulants, flocculants There are a lot of companies that operate just one two or three facilities that I imagine are The main targets to be rolled up so over 120 of them operate one two or three facilities. So I'd say there's consolidation expected there And then in the chemical side as a whole I would say that sentiment is improving slowly So it'll be interesting to see how supply chain And security continues to be resolved, you know both domestically with bridge and rail issues and then internationally where you still have Red C conflict causing issues with the Suez Canal so The chemicals in industry will be especially within water treatment will be excited to keep an eye on and then I would say With overall deal flow It's definitely been more recessed this year than we've expected I mean, there are plenty of reasons for that interest rates staying higher than expected I think we're also at that time point now where Maybe still early on but we're getting into that time frame where our companies that bought in At cheap interest rates could be looking at exiting but the valuations aren't matching their expectations So yeah, I'll be interesting to see how those trends play out and maybe even in the chemical sector specifically you have a lot of these different big Companies like Salinas for example that might be looking for an IPO and the next year or two and It'll be fascinating to see how the market responds to that in terms of valuations Yeah, I think if interest rates improve that we're I think the expectation expectations are the deal flow will pick up And you're you're point about Salinas will be interesting their Interesting player which I think we were talking a little bit about the chest today There was some expectation that they would be interested in us alco as well, so I look forward to Sort of tracking that in that market as a whole so With that being said it sounds like you know the role when I listen to what you're saying here And also the research note that you put out to clients recently on this deal specifically private equities playing a bigger role Supply chain issues within the chemical markets seem to be subsiding a little bit Therefore that's to the benefit of the end user and customer I would expect that prices will come down A little bit from maybe they're covid or re covid highs whenever that was And then lastly, I think your point is a good one so some of these companies whether be Apollo or TJC they just got into it in this case, so But there could be some big deals to come down the road in the future So to be interesting to see when and if they exit over the next five to Ten years in some cases, so That being said what else you get what else you're working on these days Well, the most immediate thing is we will be having the webcast next week. I believe it's next Thursday, so By the time that this episode drops it may be a day a couple days before so If you aren't signed up for that definitely register you can always find the recording On the website, so stay tuned for that In that case, we're looking at sort of with you want to call a high-tech sector So we're looking at the market for data centers What's happening with the water management there as well as semiconductors those are two segments that A lot of clients and Other people in the industry have been asking about because one facility counts for data centers is everybody knows and demand Is going up, so what does that mean for water management? But then The other part of that equation You will is that there's a lot of money flowing into the semiconductor space at least supposedly But if you keep reading news about intel It'll be interesting to see what where when and how that goes in the future So look forward to that. Yeah, I think thanks for bringing that up. That's a really good point So this podcast will drop on Tuesday usually Tuesday morning midday I think and then the webcast is on Thursday So if you're interested just go to bluefieldresearch.com and you can get some more information about that webcast Awesome. Well, Ethan. Thanks a million and Happy running about that Yeah, sounds great. Thanks for having me on. All right, man. Take care All right, well, that's a wrap for our 102nd episode So thanks for once again being part of the journey We're excited about the future water industry and the innovations that lie before us So stay tuned for more insightful discussions from other bluefield colleagues like Ethan Edwards To hear what they have to say. I can't tell you about how much he knows because just for Gemming on of this podcast. We're talking a lot about the semiconductor industry as well And all the ins and outs of the facilities the discharge rates Whether they're discharging to water wastewater or wastewater utilities Typically, so got a lot of information and Ethan's a big help on that as he is on this recent research note to put out So here's to the next world with that be 97 episodes after this before we get the 200s So we just celebrated our 100th Episode a couple weeks ago. So if you're interested to listen to number 100 with Keith Hayes or any of the other ones before that You can always go to Apple podcasts or Spotify or whatever Podcast platform you use so before we sign off if you're in Boston, Barcelona Let us know we'd enjoy the opportunity for meeting also if you're in New York for a climate week And they're rethinking water event at Columbia University on the 24th of September Let us know because I'm going to be there. It looks like I might be hosting a panel They're rethinking water. We're still working on the details. No promises But then we'll also be a weftech a couple weeks later Please subscribe to the future water podcast and give us a review Send us a note at water experts at bluefieldresearch.com with any topic ideas that you might have or you'd like us to discuss Just got some feedback from someone in Texas recently, which was really appreciated And great to hear that about not only their interests, but also the we're shedding some light on the Water industry in and of itself Lastly, tell a friend about the future water podcast This podcast and these water industry insights have been brought to you by the one and only bluefield research to learn more about us Visit us at bluefieldresearch.com until we talk again be well be safe and take care [MUSIC]