Water War Dilemma: Why Is GE Selling Its Industrial Water Unit?

If there is one component of life that no one can do without, it is water. The need around the world for more water infrastructure and development has been widely reported for over a decade now. So what are investors supposed to make of the notion that General Electric Co. (NYSE: GE) is selling off its Water & Process Technologies business?

GE is selling its water treatment solutions outfit to Caisse de dépôt et placement du Québec (CDPQ) and SUEZ. The agreement is set to value GE Water at roughly $3.4 billion.

CDPQ will invest over $700 million for a 30% stake in GE Water. SUEZ will have a 70% stake and will contribute its industrial water business to GE Water to create a new self-standing business unit within SUEZ. This new business is said to include all industrial water activities with a global focus.

This is not a small-potatoes deal for GE. The company’s water operation has operations in 130 countries, and it includes more than 7,500 employees dedicated to the treatment of water and wastewater.

Wednesday’s press release about the sale signaled that the long-term demand for water treatment equipment, chemicals and services are expected to remain strong both. It cited growing water scarcity and the impact of global warming on the water cycle. If this is such a great business, why is GE selling it?

One interesting thing to consider about this sale is that there was no commentary from GE about it. The presentation from SUEZ showed the following data in its slide show:

  • EPS accretive on year 1, with strong revenue and cost synergies;
  • Double-digit accretion based on run-rate cost synergies;
  • Bridge financing fully secured, to be refinanced through a capital increase, straight and hybrid debt;
  • Recurring sales are 65% of the total sales;
  • Total team will include 7,500 employees from GE Water and 2,000 from SUEZ;
  • SUEZ+GE will rank third in the global industrial water landscape at 2.5 billion euro in sales, behind Xylem (2.7 billion) and Ecolab (3.6 billion), with dominance in Europe and North America;
  • and an attractive global industrial water market expected to grow at a 5% per year until 2020, exceeding GDP growth.

Michael Sabia, president and chief executive officer at CDPQ, said:

With an emphasis on industrial applications, GE Water has positioned itself as a key player in the water treatment industry thanks to its cutting-edge technology and a management team that has proven itself highly skilled at leveraging that competitive advantage. Operating in a core industry, GE Water has built a premier business with recurring revenues and a high-quality and diversified customer base. This investment is therefore highly aligned with CDPQ’s long-term vision and its strategy of increasing its emphasis on stable assets anchored in the real economy, alongside a world-class operator such as SUEZ.

Jean-Louis Chaussade, CEO of SUEZ, said:

I am very proud to announce the acquisition of GE Water, which will accelerate the implementation of SUEZ’ strategy by strengthening its position in the promising and fast-growing industrial water market. This combination will create further value for both our clients and shareholders. Clients will benefit from the combined knowledge, expertise, geographic footprint and leading edge products and services available. The transaction will also deliver strong value to our shareholders by enhancing SUEZ’ profitable growth profile. I look forward to integrating GE Water’s highly skilled staff to our teams to form an unparalleled industrial water platform. We are also thrilled to join forces with CDPQ, a financial investor which shares our long term vision for our business.

Investors in GE have not bothered too much about the deal. GE was down 0.2% to $29.80, in a 52-week range of $28.19 to $33.00. GE’s market cap is $260 billion, and its revenue in 2016 was $123.6 billion.

Water is still touted as a critical need in the future for many investors and consumers alike. Unfortunately, maybe it just isn’t enough to move the needle for a conglomerate the size of General Electric.

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