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Making A Splash In Water Treatment

Private equity players eye opportunities in the industrial water treatment market

by Marc S. Reisch
February 3, 2014 | A version of this story appeared in Volume 92, Issue 5

Credit: Excellere
Scientists analyze water samples in the labs of U.S. Water, a firm whose growth has been fueled by private equity firm Excellere.
Two men in PPE work in a lab.
Credit: Excellere
Scientists analyze water samples in the labs of U.S. Water, a firm whose growth has been fueled by private equity firm Excellere.

The water treatment business is anything but a backwater. The growth through acquisition by brand-name firms such as General Electric and Ecolab is well-known.

At the same time, media coverage of water shortages is spurring investor interest in all things water. Big chemical companies are calling water purification and water conservation a “megatrend” that will influence their businesses for years to come.

Less well-known is the effort by private equity firms to snap up much smaller water service companies. These investors see more prosaic opportunities to consolidate a fragmented institutional and industrial water treatment business. They also see shale gas water treatment, industrial water recycling, and minimization of the energy used to treat water as additional areas in which to expand.

Colin Frayne, president of the Macon, Ga.-based consulting firm Aquassurance, estimates the size of the U.S. market for treating water in commercial facilities at about $6 billion annually. Water service firms typically test and treat water used in heating and cooling equipment at schools, hospitals, shopping malls, and manufacturing plants. Without the treatment chemicals that service providers supply, pipes corrode, equipment breaks down, and tainted water contaminates waterways.

“The opportunities for consolidation among firms with revenues ranging from $2 million to $20 million are very good,” says Scott Friar, vice president of private equity firm Excellere Partners. “We’ve had discussions with many of the hundreds of small U.S. water service firms.”

In January 2011, Excellere took a majority stake in one, U.S. Water Services, based in St. Michael, Minn. Since then, with backing from Excellere, U.S. Water has made seven acquisitions that have taken its annual sales from $36 million to $125 million today.

Other private equity firms also have taken stakes in small to midsized water service firms over the past few years. Bolder Capital, for instance, acquired Tennessee-based Nashville Chemical as well as Klenzoid, a Canadian specialist in energy-reducing treatments for water-cooling and steam systems. Prairie Capital acquired Chicago-area Industrial Specialty Chemicals and West Coast-based Clearwater Consultants.

Small firms make up one-quarter of the industrial water treatment market. a Includes firms that treat water used in hydraulic fracturing of shale. SOURCE: Aquassurance
A pie chart showing that large multinational firms make up 58% of the industrial water treatment market.
Small firms make up one-quarter of the industrial water treatment market. a Includes firms that treat water used in hydraulic fracturing of shale. SOURCE: Aquassurance

Heidi Zimmerman, executive director of the Association of Water Technologies, counts 430 water service companies, most based in the U.S., among the trade group’s members. But at least twice as many small water service firms are out there, she says.

Annual sales for the association’s service companies typically range from $5 million to $10 million, Zimmerman says. Many were founded in the mid-1970s by members of the baby boomer generation who are now looking to pass their businesses on to their children or sell out altogether.

The people who started up those service companies nearly 40 years ago often came out of then-dominant water treatment firms such as Nalco, Betz, and Dearborn, Zimmerman notes. Many were entrepreneurial salesmen and chemists who sought better pay and new challenges.

The time was ripe for them to start businesses, Frayne, the consultant, explains. Many new water treatment chemistries were then coming into use to replace environmentally damaging chromate-based treatments. These entrepreneurs could draw on a good understanding of the industrial water treatment landscape they had developed from the thorough in-house training at the larger firms.

As for the larger firms, they were slow in rolling out the new treatment options to small industrial users, Frayne says. The entrepreneurs could be more agile. And they realized they could buy treatment chemicals from big chemical makers and get contract manufacturers to blend them.

Allan Bly, founder and chief executive of U.S. Water, started up his water service firm later than many of the other independents. A chemical engineer who had gone into sales, Bly worked for Nalco for 14 years before he started U.S. Water in 1997. Excellere, the private equity firm, didn’t get involved with U.S. Water until 2011.

When Bly started his business with his wife and two employees, medium-sized industrial customers were underserved, he says. Bly thought he could offer them a package of service, chemicals, and equipment they just weren’t getting elsewhere.

To serve the midsized market, Bly needed to gain heft. In 2000, he acquired his first business, a service company called Utility Chemicals. At the time of the acquisition, he says, “we had $1.5 million in annual sales. That acquisition doubled our size.” To pay for it, Bly mortgaged his home, borrowed money from relatives, and cashed in his retirement savings.

Utility Chemicals gave U.S. Water a laboratory and a platform for further growth, Bly recalls. Around that time, the market for corn-derived ethanol fuel was beginning to grow. Bly focused his company, which has its headquarters in the Midwest where many ethanol plants were being built, on the biofuel market.

Biofuel plants are a lot like breweries, Bly says. However, they were using an excessive amount of water: about 8 gal for each gallon of ethanol they produced. Bly says he positioned his firm to offer water-handling equipment, chemistry, and services to ethanol makers.

“We were able to get water use down to 2.5 gal of water for each gallon of ethanol they made,” Bly says. In some instances, his firm helped ethanol makers eliminate discharges into the environment by installing water-recycling systems. Today the firm provides services to 110 of the 180 ethanol plants operating in the U.S., he says.

Bly diversified the business in 2008, when he made a deal to take over some of GE’s midwestern accounts at medium-sized hospitals and universities and at light industrial firms. Later, with Excellere’s help beginning in 2011, he made acquisitions in the Southeast, the Northwest, and California. Last month, U.S. Water bought ChemCal, a Texas-based water service company with about $25 million in annual sales. Bly says his goal is to achieve sales of $250 million by 2020.

By then it is possible that Excellere will have sold its position in U.S. Water. Excellere’s Friar notes that his firm typically holds its investments for five to seven years.

Bly, 51, says he has more goals to fulfill at U.S. Water, such as taking the company into international markets. “Argentina makes a lot of corn-based ethanol,” he says. “It makes sense for us to be there too.”

With Excellere’s help, U.S. Water has grown from a regional player to a firm with a national footprint, Friar notes. Given its position as a consolidator in the fragmented water service industry, U.S. Water has a bright future, Friar says.

Other smaller firms may look to their own private equity backers to help them emulate U.S. Water’s growth. And those that don’t may just be ripe for acquisition.


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