Insight from Christopher Gasson, GWI publisher
Published August 6th, 2015
What is right for the water industry at this minute in time? I have been thinking about this question for two reasons. First, because of my work with Amane Advisors, I am now more involved in advising on corporate strategy, and if you are going to tell someone that they should do something, you need to have a coherent story about why they should do it now. Second, because I was sent a link by Underground Solutions chief Andy Seidel last week to a TED talk by Bill Gross of IdeaLab. In the clip, he analyses the five success factors behind successful start-ups: the idea, the team, the business model, the funding, and the timing. He concludes that timing is 42% of the cause for success, while the team accounts for 32% and the idea only 28%.
Seidel applies this to his own business. “We were lucky to start a pipe business that relied only on rehabilitation and repair on the cusp of the 2007 epic real estate collapse (which normally feeds the pipe industry). Experienced management meant that we picked the right business model, were able to execute, and had capital as necessary. No doubt the idea was good, but it was good for the five years before we came along. I’m pretty sure we’ve got the same dynamic right on the switch from gaseous chlorine to liquid hypochlorite in the area of disinfection. It’s why we’ve been able to drive over 30% in compounded annual growth rate (CAGR) since 2006 and be profitable since 2009.”
The importance of time also applies to my own business. I bought Global Water Intelligence in 2002 for £17,000 and then stepped on the most enormous growth curve as the desalination market tripled in size between 2002 and 2007 (it has since slipped back to 2002 levels, but we have long since diversified beyond that market).
Seidel’s first career in the water industry was with USFilter. That also benefitted from good timing. Together with Dick Heckmann, he was able to roll up a water business with revenues of $5 billion from scratch during the 1990s. It benefitted from the fact that at that stage, the US water market was largely unconsolidated, and acquisition accounting rules – together with a rising stock exchange – meant that as long as USFilter made acquisitions at a lower multiple than its own earnings were valued at, its share price would rise with each company it bought. The final exit – selling the business to Vivendi for $6.1 billion in cash in March 1999 – showed a true genius for timing. Vivendi, under Jean-Marie Messier, was at the peak of its imperial ambitions, fuelled by rich cashflows from its French municipal business, and dying to prove that a dull boring utility could be just as much a growth stock as any dot.com upstart.
Looking around the market today, I think it would be quite possible to build a $5 billion water business from scratch. There are five or six systems integrators with revenues of $50m - $200m which are readily available, and once you start pulling them together, some of the larger corporate assets could easily come loose. Broadening out beyond systems integration and equipment supply, there are also opportunities to acquire assets in operations and water treatment chemicals.
The problem is that such a roll-up is possible mainly because there are more buyers than sellers, and the reason why things are that way is because the growth prospects in water are currently considered to be pedestrian compared to those in other sectors such as pharmaceuticals. Shareholders probably want to see more than just a cost-cutting consolidation before they accord the roll-up company the kind of ratings that USFilter enjoyed.
My feeling is that any kind of roll-up has to be accompanied by a change in business model. Although Bill Gross reports that the business model only accounts for 24% of success, I think that the timing is right to explore alternatives to the traditional equipment/systems sale, and that the real opportunity in the water market today is to acquire businesses at low prices, and to evolve them towards pay-as-you-go services instead of one-off sales. The combination of overstretched public balance sheets, the growing complexity of water technology, increasing water scarcity and tougher regulation, and tighter management of corporate assets, means that all water companies are faced with the choice of either stagnation or evolution. There is an opportunity for someone to take leadership in this area. Five years ago, when the world was awash with stimulus money, it would have been too early. In five years time the space may become too crowded.
I am not expecting an immediate up-tick in activity, but I do feel we have reached something of an inflection point in terms of the opportunity. It is why we published a report on the market for private sector participation in the municipal market earlier this year, and why we are publishing a report on the industrial water services market at the end of next month.
AI
