Minnesota’s suddenly flush with water. And it has nothing to do with 10,000 lakes.
A deluge of acquisitions by Pentair, 3M, Ecolab and General Electric have made the state an emerging hub in a multibillion-dollar business. The four companies are now the go-to equipment makers for everything from wastewater treatment to filtering water for Coca-Cola, medicines and swimming pools.
The firms now generate more than $3 billion in water-related revenue. That’s still well below the size of the medical device industry in the Twin Cities, where Medtronic, St. Jude and Guidant alone have about $16 billion in annual revenue. But that $3 billion for water treatment compares with the $900 million the business was worth to companies here just two years ago.
The deals have put Minnesota on the map in a sector that is projected to grow from the current $100 billion in annual worldwide revenue to an eventual $400 billion a year.
“You just say wow! There is just billions and billions of opportunity here,” Thrivent Financial analyst Kent Mortensen said. “I don’t know that there is any reason behind it, but it is really interesting that Minnesota would find itself” becoming a center for water technologies.
Debra Coy, water analyst for Stanford Washington Research Group, agreed. ” I don’t know if there is another state that really has seen as much [water acquisition] activity, particularly because of Pentair, which has become kind of the poster child for growth and expansion of the water industry,” she said “Pentair and GE have been two of the most active acquirers over the last couple years.”
Golden Valley-based Pentair has created a $2 billion water division through 12 acquisitions, serving both residential and commercial markets.
GE, meanwhile, acquired Minnetonka-based filtration firm Osmonics in 2003, and now has $2 billion in annual water-related sales, focused on industrial applications.
Pentair and GE aren’t the industry’s largest players. They rank around No. 4 and No. 5 after New York- based ITT Industries, with $2.7 billion in revenue, and French water utility firms Suez Water and Veolia, which have about $7.5 billion and $10 billion, respectively, in revenue.
But Pentair and GE have outpaced the $1 billion USFilter, which Germany-based Siemens just acquired, and U.S. based Danaher Corp., which has roughly $600 million in water revenue after acquiring Trojan, Coy noted.
3M became the latest Minnesota player in the field with its $1.35 billion purchase of Cuno this fall.
Expect more deals, analysts say.
“There has been a tremendous amount of consolidation going on,” said Thrivent’s Mortensen. “It’s an area that most people have earmarked for some pretty decent growth” both domestically and abroad.
New rivals, new partners
U.S. demand for bottled drinking water and corporate and home filtration systems has skyrocketed in the past 10 years, say Mortensen and Richard Eastman, senior filtration analyst for Robert W. Baird & Co. Add to that industrial and ag processes, aging water infrastructure in older cities and sprawling new suburbs that require wastewater treatment investments.
Demand abroad also is exploding as emerging countries look to upgrade water systems and industries arise that require pure water.
Britain’s Global Water Intelligence estimates that the worldwide market eventually could quadruple to $400 billion in sales.
Pentair is well-positioned to capture market share, said John Quealy, Adams Harkness research analyst, noting the company’s recent expansions into China, Australia, New Zealand and some Latin American countries.
Pentair’s water technology sales climbed from about $650 million in 2002 to about $2 billion in 2004. Two key acquisitions helped fuel the growth. In January 2004, Pentair plunked down $215 million to scoop up Everpure, an Illinois water-treatment products firm with $60 million in annual sales, 260 employees and blue-chip customers such as Coca-Cola, Walt Disney World and United Airlines.
In July 2004, Pentair sold its low-profit tools business to Black & Decker and used the proceeds to buy Milwaukee-based Wicor for $874 million, giving Pentair a water treatment, filtration and pool equipment maker with $750 million in annual sales and the Hypro, Shurflo and Sta-Rite brands.
The growth of the water business also has brought some of the Twin Cities-based firms into direct competition, or alliances, for the first time.
For example, through its Everpure and Wicor operations, Pentair now competes with 3M and its new acquisition, the filtration company Cuno. Pentair also has recently allied with Everpure’s former competitor, St. Paul-based Ecolab, a $4 billion firm mainly known for its restaurant, hotel and hospital cleaning products.
Through acquisitions and organic growth, Ecolab now generates $125 million a year from water-related services such as industrial water treatment for poultry and meat-packing plants, sugar and dairy processors, breweries and cheese makers. It also provides water filtration, softening and mineral reduction processes for boilers, restaurants, hotels, cruise ships, nursing homes, government and educational facilities.
Ecolab increasingly competes with General Electric; Nalco Co., a water treatment and chemical firm with $3 billion in sales, and privately held ChemTreat Inc., which has $172 million in sales and is the third-largest industrial water treatment firm in the country.
Jeff Burt, vice president of Ecolab’s water care division, said the partnership with Pentair will help Ecolab grow its business. Ecolab is replacing its customers’ old beverage filters with Pentair cartridge filters during its normal service calls to hotels and restaurants. Pentair and Ecolab also plan to co-develop new technologies.
“Water is a huge industry, and it’s a great opportunistic industry. Look at the water scarcity problem in various [U.S.] communities and municipalities. It’s becoming a huge, huge issue,” Burt said.
Saving ‘discharge fees’
Some states and cities now charge restaurants “discharge fees,” depending on the amount of grease and food contained in the water that flows down kitchen drains. “These discharge fines and surcharges can run to into the millions of dollars a year,” said Burt, who envisions new wastewater treatment contracts to control the problem.
While Ecolab strictly caters to hospitality, institutional and industrial clients, Pentair serves both industrial and residential clients with sump pumps, drinking water filtration systems, storage tanks and pool equipment. Combined, the two companies pose an obstacle to some competitors.
The pairing “was a little bit of threat to Cuno before it was acquired” by 3M in August, said Eastman of Robert W. Baird.
Wall Street skeptics
With Connecticut-based Cuno, 3M gained a solid foothold in the liquid filtration equipment used by Subway, Coca-Cola and beer, wine, pharmaceutical and cosmetics manufacturers.
“We are expecting that we will produce double-digit growth for our water filtration systems,” said Netha Johnson, 3M business development director.
Quealy of Adams Harkness said he believes Cuno, which has $423 million in annual revenue, will provide a strong boost to 3M.
“Cuno is a pure filtration player. They have some of the fastest and strongest growth rates of the industry,” Quealy said. “And Cuno competes heavily against [Pentair's] Everpure line. So they do compete and they know each other quite well.”
Thrivent’s Mortsensen is even more upbeat about the 3M move.
“I know a lot of Wall Street thought the deal was overpriced. But frankly, I just thought it was a great marriage between the two companies,” he said. &ldq
uo;Cuno had done a wonderful job in terms of penetrating the United States market. But their next leg of growth was going to be international, and Cuno did not have that distribution channel. … I really thought if anybody could add value to the Cuno franchise and make it greater than the sum of its parts, 3M could.”
Still, Wall Street has shown some skepticism toward both 3M and Pentair in recent months.
Cuno acquisition-related costs sapped 2 cents a share from 3M’s recently reported third quarter earnings. But long term, 3M expects cost savings, cross-selling and product innovations to justify the acquisition price. The just-merged operations will need time to demonstrate their worth, analysts say.
At Pentair, CEO Randy Hogan recently announced slower growth for the fourth quarter and 2006 because of a delayed plant closing, integration issues and soaring material costs following hurricanes Katrina and Rita. Pentair’s stock plummeted in reaction, falling 15 percent in October to near a 52-week low of $30.80.
The stock has since recovered to about $38, but is still off its 52-week high of $46.47.
Quealy admits that he lowered his rating on Pentair, but said it’s only “a near term” call.
“If you look at the stock performance, it was one of the best performers from 2004 through the first half of this year,” Quealy said. “They had been so successful so quickly once Wicor was closed several quarters ago that now they do seem to have a bit of a slowing down. … They are partly a victim of their own success.”