Rise in Water sector M&A predicts Catalyst

Following the regulated water sector’s proposed plans to spend £27 billion between 2010 and 2015 modernising the UK's ageing water infrastructure, (compared to just less than £20 billion between 2005 and 2010), Catalyst is predicting a significant rise in private company activity in the sector, accompanied by a large increase in M&A.

M&A in UK water over the last three years has been dominated by the takeover of seven major water operators, with six acquired by infrastructure investors including Macquarie’s high profile purchase of Thames Water.

These deals aside however, the volume of transactions has been low, and mostly of relatively small value across a broad range of products and services. There have been notable exceptions, including the £100 million sale of BWA Water Additives by Close Brothers Private Equity, the sale of Pims Group by Gresham Private Equity and 3i’s £100 million buy-out of infrastructure pipes business Radius Systems. But all the signs point to an inevitable increase in interest from the traditionally smaller players.

“There are increasing political and financial pressures on the sector to modernise and address some of the key issues of the moment such as climate change and sustainability. This will lead to significant opportunities for innovative niche companies over the coming years”, says Richard Holden from Catalyst.

Catalyst’s analysis of the water sector has shown that M&A is at a staggeringly low volume compared to that within the oil and gas sector, where there have been over four times as many M&A transactions over the last three years. It would appear that there is little economic substance behind the oft-quoted phrase ‘water is the new oil’ today. “I am sure though, given our analysis, that this is about to change,” says Holden.

Oil and gas M&A has been largely driven by the recent high demand for energy and a desire to reduce dependency on gas supplies from Russia. Accompanied by strong growth in support services to the industry, the boom was sustained by unusually high oil prices, which has led to an inevitable consolidation of smaller players by larger integrated energy companies around the world.

Richard Holden says that the water industry in comparison, led by large regulated water companies and foreign industrials such as Veolia and GE, is less affected by economic cycles. “This,” he explains, “together with the anticipated higher levels of activity driving increased valuations, makes the sector particularly attractive to investors.”

He concludes, “Catalyst predicts an increase in deal volumes as the larger non-regulated players continue to develop integrated service models. Furthermore, increasing interest by infrastructure and private equity funds will also drive deals as they hunt for investments in strong niche players.”