Managing Growth Virtually

A LITTLE MORE than a month ago, Close Brothers Private Equity completed the $200 million sale of BWA Water Additives to Seera Investment Bank, a private equity firm based in the Persian Gulf kingdom of Bahrain that adheres to Islamic banking principles—among them an aversion to interest-bearing financial instruments. The new owner may be atypical, but Paul Turgeon, BWA's president and chief operating officer, says it is on board with his strategy of acquiring water treatment chemical brands and intellectual property without buying manufacturing plants.

BWA was formed in 2006 when Chemtura sold its water purification and industrial water additives business—but no production plants—to Close Brothers and a group of senior managers including Turgeon for $85 million. At the time, Turgeon says, BWA had annual sales "in the mid-$80 million range" of specialty additives sold into water desalination, industrial water treatment, and oil-recovery markets.

BWA's biocides prevent microbiological growth in process water; in addition, its corrosion inhibitors and antiscalants prevent oxidization of iron and steel and limit inorganic deposits on the surface of pumps and pipes. "Our additives are specialty severe service products. They work where a commodity chemical just won't do," Turgeon says. "We're a niche player in a $12 billion-a-year water treatment market," he points out, where the big players include General Electric, Dow Chemical, Nalco, and Ashland.

With the help of acquisitions underwritten by the firm's new owner, annual sales could reach $500 million in seven or eight years, Turgeon says, up from about $130 million today. He wants to acquire "unexploited brands" of industrial water and desalination chemicals, as well as water-treatment-related intellectual property ranging in price from a few million dollars up to $300 million.

BWA made its first acquisition nearly two years ago when it bought Atkinson Chemical for an undisclosed sum. The small firm distributed water treatment chemicals from BWA and other companies and so brought no manufacturing assets with it.

That's the way Turgeon likes it. He is looking for acquisitions that don't include the production facilities that a buyer usually obtains when chemical businesses change hands. BWA is a "virtual company" and operates without any production assets of its own. Not unlike biotech firms that develop and conduct clinical trials for new drugs but farm out production to specialists, BWA researches and tests new additives with its customers but leaves production to others.

Chemtura makes two-thirds of the products BWA sells to water treatment customers; other producers make the balance, Turgeon says. Suppliers like Chemtura make BWA additives under agreements that safeguard the smaller firm's patents and trade secrets. BWA has only about 85 employees, 20 of whom devote their time to developing new products for customers in labs in Atlanta, Ga., and at the firm's Manchester, England, headquarters.

"Seera supports the use of opportunistic acquisitions to grow our business," Turgeon says. Capitalized with dollars earned from the petroleum boom in the Middle East, Seera is looking for investments with good returns and that adhere to Sharia, or Islamic law. Seera bought BWA according to such principles.

A SHARIA-COMPLIANT BANK, for instance, does not deal in interest-bearing investments. Instead, it relies on contracts to buy and sell commodities at predetermined prices to raise money. It also does not support investments in businesses related to alcohol, gambling, or tobacco.

Although considered controversial by some Western groups, Sharia-based banking has not been a problem for BWA, Turgeon says. The steps it took to comply with Sharia to get bought were not onerous. And compliance has had little effect on the firm's daily operations. For one thing, BWA generates enough cash for its own needs. It also isn't involved in any proscribed businesses.

"The only impact we've experienced on an operating basis is that our working bank accounts are no longer interest bearing," Turgeon says. More important to Turgeon is that Seera gives BWA managers a free hand in expanding its water-additive business.

Much of that growth is coming from the Middle East, Seera's home base, and North Africa, areas where a number of water desalination projects are now under way. The regions' limited freshwater resources, along with rapid industrial and population growth, make desalination a fast-growing option for generating clean water, notes Eric Meliton, an analyst at business research publisher Frost & Sullivan.

BWA's R&D staff in Atlanta and Manchester work with customers to make sure the firm's additives do their job efficiently, Turgeon says. They also cooperate with academic institutions to do basic research. For example, one partnership is with researchers at Heriot-Watt University, in Edinburgh, Scotland, for work on additives to enhance oil recovery from wells.

Improving its intellectual property and brand acquisition strategy are the keys to BWA's future, Turgeon says. And Seera promises to provide BWA with the capital to build on the sales growth it has achieved so far without gaining heft.