Capital Flowing To Water Technology Startups From Big Corporations

Capital Flowing To Water Technology Startups From Big Corporations

By Hana Askren and Marlene Givant Star, with analytics by Lana Vilner

Water technology startups are turning away from venture capital and seeking financing, partnerships and other development support directly from large strategics rather than financial investors, according to an analysis by Mergermarket.

This is beneficial in many ways. For one thing, strategic investors can become eventual acquirers and may be inclined to take a longer view, seeing the development of new technology as integral to their business — not simply a financial investment, according to water executives and investors. Strategics also have a marketing and distribution reach that far outpaces what young companies could create on their own, they say.

For example, desalination company Forward Water Technologies’ CEO Howie Honeyman told Mergermarket it is working on commercializing its technology through a partnership with an oilfield service provider.

Water is integral to industrial processes, the oil and gas and power sectors, as well as municipalities, which means most technologies have huge potential markets, according to one early-stage investor. There is a “broad array of applications” from clean parts for automotive, aerospace and other industrial production, to aquaculture to food and produce production and wastewater, says Paul Weisbrich of investment bank DA Davidson.

But early-stage companies are not well positioned to take advantage of the opportunities on their own, even with VC funding. Equity investments, joint ventures, channel and sales partnerships, and other deal structures can all allow startups to target a specific market initially. Once a technology is proven for a specific application, a company may be better able to self-finance commercialization for other applications.

Weisbrich says the industry is on the cusp of shedding old technology and strategics are eager to capitalize on “what technology is around the bend.”

Realtech Water CEO Jodi Glover notes that large corporations have approached the company for investment because it can be difficult for them “to continue to have that focus on R&D and innovation.” Real Tech’s sensor technology combines with artificial intelligence to monitor water for contaminants.

The water segment is becoming a “barbell industry,” with either very small companies or very large strategic players because “the small companies get snatched up right away,” Weisbrich says.

“The water business is not as dynamic and sexy as the web or Internet or technology deals but the value proposition is pretty outstanding,” says Rick Malone, managing director of privately held AST Filters. Malone says the reason strategics are attracted to startups in the space is that they understand it’s a tough long-term market to penetrate. For instance, AST is working on filtration for the water used in industrial processes such as plating and for processing dairy products, where manure in effluents is a big problem.

“Venture capital can help you grow but it (requires) a long-term investment and testing period. You can have a great return in 10 years,” Malone adds.

The largest water deal in the last few years was the late 2017 $3.4 billion acquisition of GE Water and Process Technologies by Suez, along with Canadian pension fund Caisse de dépôt et placement du Québec. Japanese treatment company Kurita Water Industries announced last month its $270 million acquisition of US Water Services. EBITDA multiples have ranged from 9x to as much as 23x for deals with stated valuations, according to the Mergermarket database.

Desalination company Saltworks Technologies has only corporate investors, giving it flexibility that it might not have had with VCs, says CEO Ben Sparrow. Now that the company is further along in its development, it is looking to raise $15 million and would consider strategic or financial investors, according to a December 2018 Mergermarket report.

Another desalination company, Atlantis Technologies, has a distribution partnership that includes an equity component with Evapco, and is discussing partnerships with others, according to a November 2018 report by Mergermarket. Water treatment company Neopure Technologies pivoted from seeking venture capital to looking at corporate investors, according to a late 2017 report.

The list of strategics investing in water technology is long. Global giants Veolia and GDF Suez are among them. GE, Nalco, Aquatech, IDE and oil and gas supermajors have also been mentioned as investors in reports by Mergermarket.

Strategics such as Pentair are able to see this upside and know that the margins can be high, Malone adds. In January, Pentair acquired two companies: Aquion, which manufactures water treatment equipment and water quality-solutions, and Pelican Water Systems, which provides residential whole home water treatment systems.

Strategic Deals in Water Tech

Here’s a listing of water tech deals since 2016 with disclosed multiples:

Company Bidder Year Revenue multiple EBITDA multiple EV ($m)
U.S. Water Services Kurita Water Industries 2019 1.6x 270
Calgon Carbon Kuraray 2017 2.5x 20.9x 1308
Horizon Technology Biotage 2017 2.0x 23.4x 16
Rockwater Energy Solutions Select Energy Services 2017 1.6x 508
Suez Water Technologies & Solutions (formerly known as GE Water & Process Technologies) Caisse de Depot et Placement du Quebec; and Suez 2017 1.6x 9.9x 3379
JWC Environmental Sulzer Management 2017 12.6x 215
Sensus USA Xylem 2016 2.0x 10.7x 1700
Aerex Industries Inc Consolidated Water U.S. Holdings 2016 0.8x 15

Hana Askren is senior reporter-natural resources, and Marlene Givant Star is New York editor for Mergermarket and Dealreporter. Lana Vilner is Head of Research-Americas for Mergermarket.

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