Shares in water and wastewater remedy options firm Evoqua Water Applied sciences (AQUA -1.19%) rose 15.5% this week by means of Thursday. The massive information was Xylem‘s (XYL -1.18%) acquisition of the corporate in an all-stock transaction valuing Evoqua at round $7.5 billion.
The deal makes good operational sense for each corporations. Xylem generates 55% of its gross sales internationally. As compared, Evoqua generates 82% of gross sales from the U.S.
Being half of a bigger firm with a longtime presence in Asia and Europe will assist Evoqua’s merchandise discover a new viewers. Constructing scale in new geographies is tough, and Xylem may even profit from an expanded product vary.
Furthermore, Evoqua’s heavy industrial focus (82% of gross sales) brings diversification to Xylem’s income stream (presently 50% utilities, 35% industrial, and 15% industrial/residential).
The companies’ complementary nature might be why the associated fee synergies related to the deal should not exceptionally excessive. Administration goals for $140 million in run-rate value synergies inside three years. Nevertheless, that determine is lower than 2% of the mixed income now, not to mention what the mixed income will probably be after three years. A tough rule of thumb is to take a 5% goal for value synergies.
Whereas the deal appears to be like costly for Xylem, the water expertise sector tends to be richly valued. Xylem itself trades at 32 instances subsequent yr’s estimated earnings. And the acquisition provides progress potential in an trade servicing an important a part of international infrastructure.
Lee Samaha has no place in any of the shares talked about. The Motley Idiot has no place in any of the shares talked about. The Motley Idiot has a disclosure policy.