The water business is heating up after a blockbuster deal was announced.
(ticker: XYL) said Monday it was acquiring its peer
Water Technologies (AQUA) in an all-stock merger that values the target around $7.5 billion.
shareholders are set to receive 0.48 a share of
(AQUA) share, representing a value of $52.89 a share. That’s equivalent to a 29% premium based on the companies’ closing prices on Friday,
The deal values Evoqua at about 22 times estimated calendar year earnings before interest, taxes, depreciation and amortization, or Ebitda. Industrial stocks in the S&P 500 typically trade for 12 to 14 times estimated Ebitda. Evoqua, however, has a history of strong growth and water-related stocks typically get a premium valuation multiple. There aren’t all that many pure-play water companies.
Despite scarcity value, Raymond James analyst Pavel Molchanov believes the price paid was too high.
“After six years with essentially no M&A, Xylem gets back into the game in a very pricey way,” wrote the analyst in a Monday report. “Evoqua’s shareholders ought to be popping champagne. Xylem’s, not so much.”
Stock in Xylem fell 10.2% to $98.95 a share. Evoqua shares gained 11.4% to $45.68.
The deal is expensive. That’s one reason for the weakness in Xylem stock. Some weakness should be expected in any all-stock deal thanks to arbitrage trading.
In an all-stock deal, shares of the acquirer can be pressured by arbitrage traders looking to lock in a profit by selling short acquirer shares and using that money to buy shares of the target. The arb-spread, or the difference between the price paid for Evoqua shares now and what investors will get when the deal closes, in the Xylem-Evoqua deal is currently about 75 cents.
“Our acquisition of Evoqua creates a transformative global platform to address water scarcity, affordability, and resilience at even greater scale,” said Patrick Decker, CEO of Xylem.
Xylem shareholders will own around 75% of the merged company, which will be led by Decker.
Both companies are big water players. Xylem makes pump, valves, filters, meters and much more. Evoqua has a significant water and waste-water treatment business. It’s easy to see how combining the two companies could generate synergies.
Management said annual synergies should amount to about $140 million within three years. The combined company will generate annual sales of about $7 billion.
Coming into Monday trading, Evoqua shares were up about 5% over the past year. Xylem shares were up about 3%. The
has fallen about 10% over the same span.
Barron’s wrote positively about Evoqua in July 2021 when shares were at about $33 a piece.
Write to Adam Clark at email@example.com