[00:00:00] Speaker A: Deals entry into M and A with this Provencio deal signals maybe a strategic pivot to enhance these digital water capabilities which are becoming ever so important to some of these players in the water sector.
[00:00:19] Speaker B: I am Reese Tisdell and this is the Future of Water which we talk about all the ways which companies, utilities, people are addressing the challenges and opportunities in water. This is episode 110 and I know it's going to be a good one. That's because one it's the first of 2025. Happy New Year to everybody. But also I'm going to be joined by Bluefield analyst Mike Miroff. As you may have seen on the Bluefield research website, hint hint, we recently released some analysis on Deal Meterings acquisition of provincial software company. Deal Metering is a metering company based in Germany, which I believe is in the top 5 to 10 of metering companies according to our market share globally. So I thought it'd be great to have Mike on to discuss his research, the topic, but also, you know, metering and what this might mean, but also what else is happening in Europe, as we've discussed, I think somewhat on this podcast as well, more specifically what's happening in Germany with its economy, energy prices and also to some extent Deal's role in the Russia Ukraine war and what this might mean. So the economic and geopolitical events in these markets in Western Europe in this case are also influencing company strategies and deal flow. So hopefully this will be a good one. I'm looking forward to this conversation, but before we do that, you're going to have to bear with me for at least one more minute. Let me talk about what's caught my attention recently.
All right, so I'm flying back from a client meeting in Phoenix last night. Shout out to the client and their team. Thanks for the invitation to participate in your strategy meetings. That was great.
I thought it was productive, educational in many respects. But as I'm getting on the plane or at least flying out of Phoenix, out of the desert, looking in the rear view mirror and thinking about things like the California wildfires, climate and always as I do, water in the water sector and what this might mean. So not only are these fires a reminder of the challenges facing all these communities in Southern California. Families, homeowners, but also friends and what they're having to go through. So with hundreds of thousands of people being evacuated, chances of us knowing someone impacted increases exponentially. In fact, I just learned this morning about someone I know. So increasingly we're all in that boat and it's pretty Scary. So, you know, our thoughts are going out to, to those people in Southern California. But in terms of this episode, it also highlights how we manage and safeguard water supplies, but also infrastructure as well. And I say it over and over again and I wish I had coined the phrase, if climate is a shark, water is the teeth. So, you know, in terms of why does this matter?
You know, as I was talking to client Phoenix just the other day, and that is, you know, I was looking through some NOAA data. We've actually have some of this presented to clients and we've looked at about 385,000 climate related events across the US since 2000. So past, I guess now 25 years and not a small number of events.
Their damages, property damages totaled about $558 billion over that time and about 80% of those are water related.
So, you know, it, it showcases what the role of water plays in all of these events, which are driven by other reasons which we can get into.
But I think the, the point is in this case it's just tied to Southern California.
It continues to face drought conditions despite the above average water years over the last two years in 2022-23, so well as 23 to 24. However, the current water year is falling behind significantly already with regions like the Santa Monica Bay watershed receiving just 0.23 inches of rain since October 1, which is well short of the 5.69 average, 5.69 inches at this time. So it's just an indicator what, what the region faces. And to put it in perspective, you know, the Palisades fire is burning in a region that's critically dry compared to the previous years.
So admittedly this is a good example of the problems and challenges we face with climate change. You know, it's really a confluence of events. The high winds were coming, there's dry fuel base in the region, it hasn't been raining, so it's not wet enough. And then all it takes is a spark and it's gotten away from us.
And that's one of the challenges. And obviously in a highly populated area, so while not directly water related, water plays a role.
And so now the question is, you know, if we're not going to do anything about it, I mean, if the water supplies are climate related, then we reduce carbon emissions and hopefully that solves the problem. But we're obviously not doing that. So we're sailing past our target. So in frustration perhaps right now, maybe it's just I woke up on the wrong side of the bed, but I think we just need to start focusing more on adaptation and that's learning to deal with it, with a situation that we have created in some respects.
But what does this mean for water infrastructure? So if we're not going to do anything about the emissions and the climate overall, let's look at infrastructure and what this might mean. So hopefully it goes without saying firefighters rely on water from reservoirs, hydrants, storage tanks for effective suppression. Everybody talks about water utilities and infrastructure really in terms of drinking water and emerging contaminants and wastewater collection and treatment.
And the one thing that everybody seems to overlook, if you think about it, water infrastructure is also critical to risk mitigation and fire protection. Out of curiosity, as I was on the plane flying back, I went into our Data Navigator, which is Bluefield's data visualization tool, to see that the most recent forecast that we put out this past year shows the fire hydrants in the US spend on them. Capital spending is approximately $8 billion through this decade. So it's not an insignificant amount for those little stumps sticking up along the city streets as you drive by. And in my case, you can't park at, otherwise you're going to get a pretty steep fine.
And then separately, storage tanks, about $12 billion through the decade. So we're looking at $20 billion on two pieces of the puzzle that are related to fire suppression. I'm not even talking about reservoirs. That's not in our capital forecast. But then you get into leaky pipes and water pressure, which is what people are starting to raise cane about. But the reality of it is there's massive demand on water supplies right now because people are trying to protect their properties, whether it be the firefighters or individual themselves.
And so we do need to think of that. So next time a congressman, a city leader, manager, pushes back on infrastructure spending and, or raising rates for things such as this, I'm not saying they're wrong to push back. What I'm saying is we do need to keep in mind if the climate in regions like the west, and you could extend this to places like Australia or, or Spain as well, we get wildfires in the east coast as well. But in fact, where I live and just outside of the city of Boston, that's in fact an issue. We need new water tanks and part of this is because of fire risk and as a buffer for our own safety. And there's pushback. It's expensive. That's just where we are. Everything is expensive these days for whatever reason.
But keep this in mind. There's a real impact of water infrastructure and how we fight off climatic other events such as wildfires.
And then I think the other thing to think about is, you know, unreliable water systems, outdated and insufficient infrastructure means, delays and gaps in these firefighting efforts. It puts people's lives and property at greater risk. So investing in resilient water systems, it's not just about daily use. It's about being prepared for the worst when it does in fact happen. So as I've discussed with clients and others previously, water infrastructure is in dire need of investment. We can't wait for another crisis, whether that be the Great Recession or the COVID pandemic and the long awaited infrastructure Week to address critical infrastructure such as water. The Great Recession injected just shy of $6 billion into the water and wastewater sectors. And then IIJA is put in 55 billion of new infrastructure investment. But the IJA that spending comes to an end in just a matter of years. So into 2026 and then the party's over and then what?
So I think my question to the incoming administration and Congress and political leaders is what happens after 2026 when all those funds come to an end? So that, and not to be too depressing is just something to think about. I think we just need to start thinking about solutions. So let's move on and get to Mike Miroff and talk a little bit about the oh, metering Germany and what's happening there.
All right, so I'm joined here by Mike Miroff. Mike, how's it going? Happy New Year.
[00:09:41] Speaker A: Yeah, Happy New Year to you. Doing pretty well.
[00:09:44] Speaker B: How are the holidays?
It was good.
[00:09:46] Speaker A: I went back to New York, visit my parents, had some family over so definitely a nice break and nice time to catch up with them.
[00:09:57] Speaker B: Yeah, I was saying to someone the other day it was feels like because the holidays, Christmas holiday was middle of the week. The New Year's holidays, middle of the week, it's a long holiday.
I don't know, I mean you're, you're a lot younger than I am. But it feels like the longest one I've ever had as far as just like being out of the office for the most part in terms of this time of year. So in any case, that's not why I brought you on to talk about the holidays. Port Jefferson, New York. What I wanted to talk to you about is right before the holidays there was some activity in terms of M and A and you work on our M and A and company strategy service. And one thing you worked on was a recent deal where that's no pun intended. Deal Metering made a deal. Deal Metering chose to acquire Proventio, which is I guess a software company. You can give me more details on that, you know it. To support the company's digital strategy overall. And so Deal Metering Germany based. Why don't you give us a little bit of background on the deal, sort of what it means at a high level and then we can jump into more details.
[00:11:05] Speaker A: Sure thing. So you're absolutely right. So this is Provencio is a German based company, was acquired by Deal Metering, part of the larger company Deal Group.
And essentially what we see here, I think the interesting part of this deal, again it's funny to say deal Deal but excuse me if I say that a few times but I think the interesting thing is not so much the size of this deal, it's really about the underlying technology solution that Provincial offers. It's not a terribly large company, it started in only a few years ago, 2021 I believe.
And it's really the value that lies in this platform. So it's what we would by all accounts consider an early stage startup company.
And I think the real power of it is that Provincial has this AI powered solution for leak detection and predictive maintenance, pipeline risk scoring that really helps Deal Metering push toward that realm of end to end water solutions which it's always been trying to do. So I think it really signals this adjacent step into remote asset management for Deal Metering. They've been trying to grow this analytics and services business which Deal metering started in 2022 and really the hallmark of that analytics and services business unit has been this water loss management solution. So under that umbrella, the water loss management solution is a map based monitoring tool.
Provincial really sort of can be integrated into this tool and enhance those capabilities with more advanced analytic features.
So I think this really comes at a good time. Deal Metering has posted some really impressive growth, about 2021% year over year growth.
So really sort of highlights the strategic value of investing in segments like this.
[00:13:05] Speaker B: And Deal is not, it's not a small company, I mean they. It's been around for some time, it's fairly well diversified. Maybe we can get into that as far as total revenues and things such as that. But how does this deal, I mean you, I hate saying this, I agree with you, this is terrible. As I had a conversation over dinner last night is the English language is far too complicated and silly.
[00:13:31] Speaker A: That's right.
[00:13:33] Speaker B: Get into personal stories like how many ways can you say two you can say to you can say to you can say two.
Right. Can be a little maddening at times. So Deal, Deal. Deal's deal for provincio. How does this acquisition position the, the buyer deal in comparison to its competitors? I mean, why are they doing this and what are we seeing in this metering sector as a whole?
[00:13:59] Speaker A: Sure. And I think that's always sort of as part of this service for, for M and A and top company strategies. We're always trying to think about how does this acquisition really stack up against other like acquisitions that competitors make. So that was featured in this research note and this piece of analysis that we did, we wanted to really dig into what are some other players in the peer group doing. So some of the things that we've noticed were that Xylem and Itron, two other pretty significant players in the space, have been really expanding into analytics and IoT, so doing more software base plays, while other competitors like campstrup and Badger Meter are pretty focused on more hardware solutions. And this is again, that's sort of broad strokes, but that's how we kind of divvied it up. And you know, just for example, Xylem has in our database for M and A, we've seen that they've acquired really 10 digital targeted acquisitions, a few of them that come to mind, mnet, Valor, Water analytics, among others. So Xylem has certainly been pushing more into that realm. So it's not an anomaly. Right. That Deal is making this kind of acquisition, certainly following other playbooks that other companies like Xylem or Itron have been making. So I think. Yeah. So the thing to really think about is Deal is sort of carving a niche in this connected solutions space.
And it really represents, from what we can see, Deal has made or at least engaged in some type of corporate partnerships since its founding as a segment in 2010.
But it really does signal the first acquisition by deal metering since 2010 that we've seen. So certainly an acquisition that we haven't seen from this particular segment of Deal group in quite a while. So I think Deal's entry into M and A with this Provencio deal signals maybe a strategic pivot to enhance these digital water capabilities which are becoming ever so important to some of these players in the water sector. So one partnership that kind of came to mind that is outside of the realm of M and A again and other ways that Deal is engage with other companies and trying to expand their portfolio and platform is through IoT. And we see that Deals, previous investments or partnerships like its SaaS IoT service.
Its partnership with Stackforce, which is I believe another German company emphasizes its role and focus in really trying to build out this embedded connectivity software solution.
[00:16:46] Speaker B: Yeah, I think it's really interesting and I agree. You know, how does it stack up against its peer group? I mean, you know, putting that in perspective I guess, peer group being like said Xylem, Itron, Badger, Meter, Camstrup, those are some of the leading players. I mean Diehl is, you know, just thinking back on the research you put together, you said they're Germany based. I think their revenues are what they're about a $4 billion US dollar company year annually. And I think they're metering businesses about, I don't know, 450 to 500 a year.
[00:17:19] Speaker A: That's about right. Yeah.
[00:17:21] Speaker B: And I think, you know, they're active in other sectors. Right. Which is sort of part of your the research. Right. Is they're active in I think defense industry. Correct me if I'm wrong.
[00:17:32] Speaker A: That's right. So if we're talking about the Deal group more broadly, I think it is an interesting story trying to chart out what exactly does this, this company do. So you mentioned, you're right, it's a 4 billion US doll company.
That's certainly nothing to scoff at. And you say Deal is a Germany based company that has segments devoted to defense, aviation, metal controls and metering like we mentioned. And metering is about 11% of the deal group's business. So like you said, it's pretty roughly around what you estimated in terms of revenues. But the harbinger or the really leader of its company wide growth is defense and aviation. That's sort of its bread and butter. But the interesting thing is, and I've pointed this out in the research note, deal metering has been really posting pretty significant revenue compared to some of these other segments. So you have deal metering growing 21, around 21% year over year revenue. That's pretty significant, I would say. And this is coming at a time when yes, defense and aviation are sort of the larger segments of the business. I think between the two it's over half of Deal groups revenues. Right.
But the thing that Deal itself has mentioned in some of its annual reports and press releases and other discussions that they've had, the defense segment is really propelled by NATO contracts and defense spending in this war between Ukraine and Russia which has been going on for a few years now. And aviation again, another large segment of its business has also been posting pretty interesting results. But also I think what we're trying to put into this conversation is that defense and aviation, they've faced some pretty significant headwinds.
[00:19:43] Speaker B: Right.
[00:19:43] Speaker A: And I think the long term viability of those two segments, along with metal and controls, whether it be supply chain sort of issues with controls, aviation goes without saying. There has been kind of a lot of uncertainty surrounding aviation and sort of the manufacturing of planes and procuring materials for that. And there's a whole litany of issues that can affect these segments. And then you have defense, again propelled by this war in Ukraine. And I think in terms of how long that war lasts and the appropriations, the procurement for that war, depending on how long that lasts, nothing's really certain. So I think out of that sort of those crosswinds and those headwinds that all those other segments are facing, metering emerges a really particularly attractive one.
[00:20:35] Speaker B: Yeah, it's kind of a, an uncertain environment. And I think part of that is. And maybe this is we can head into this too, which is for my next question. But you know, given what's happening, you know, we've got a new administration in the US coming in as well, which Trump and role in Ukraine. So that's sort of, there's this looming question, what happens with the US's involvement in Ukraine? And then at the same time, just I think is I mentioned in the intro, I was talking about being in Phoenix, I was looking at the news or reading the paper and they were talking about, you know, I think the incoming Trump administration has talked about that European countries need to be spending at least 5% of their GDP on defense. So maybe that's ultimately good for their, those businesses themselves. But let's just. So that's, you've laid that groundwork. But there's some other things related, unrelated with Germany itself. So what trends in the European water market might be influencing this transaction? Are there other things in Germany that could be drawn?
[00:21:39] Speaker A: Absolutely. I think there are certainly some significant macroeconomic challenges that the German market is facing right now. I mean, it's been covered pretty extensively at any point. Publication, you read, the Financial Times, the economists, they've all been tracking this sort of stuff.
But I think some of the pressing issues that the German market's facing, they're facing an energy crisis partly and in large part really because of this war in Ukraine.
Procuring natural gas has caused this energy price squeeze in Germany. It's affected it more acutely than other economies in Europe and the Eurozone. Germany also has sort of historically restrictive data regulations that have sort of impinged on water utilities and technology providers to seek out some of these innovative solutions.
And that's all backdropped more largely by sort of tepid GDP growth that the German economy is facing. So you have all these competing forces and many of them are not working in Germany's favor and it's sort of spelling trouble for the market and as a whole. So I think Deal Metering being based in Germany, it's not to say that Deal Metering doesn't have a vested interest in the German economy, nor does it mean that Deal is moving from Germany anytime soon.
[00:23:02] Speaker B: Right.
[00:23:02] Speaker A: I don't think anyone is speculating that, but I think it does speak to a larger question of are there other geographic markets that are ripe for more growth in the short to medium term as Germany is facing some of these secular fundamental issues in its economy?
And I think that's what we laid out a little bit in the research. I think it remains to be seen whether Provencio and this acquisition and the integration of the tools that Provincial provides into Deal's portfolio, whether that'll be exclusively placed in some other geographical markets. But I think it is interesting to see that it may not just be a German based play. It's just because Provencio is a German based company doesn't mean that this is going to be exclusively rolled out in the German market. I think the evidence we have for that, you see that Deal Metering has had success in international markets in the past, like in the US and in Saudi Arabia, to name a few.
Deal did open a facility in Illinois in 2021, so that further supports their goal of trying to support a growing US customer base. The Hydrus 2.0 ultrasonic meters, for example, have been performing and selling really well in countries like the U.S. italy and Saudi Arabia. So those are just a few examples of some markets that might be pretty amenable to some type of innovation that Deal can provide.
And again, Deal is about, and we estimated this in the global metering market report that Bluefield put out in 2023. And you know, it remains to be seen how that'll shake up, but I think it is the seventh or eighth largest metering provider in the world. So certainly again, Deal is not a small player in metering by any means. So I think it is interesting you have these, this sort of confluence of headwinds in Germany. And I think again, it does point to that question of where does Deal go from here?
[00:25:15] Speaker B: Yeah. And I think another thing to add and sort of looking back at the German economy and infrastructure investment overall is the role of what's a better way to put it. The replacement rates for meters, right in Germany, they've been replaced fairly quickly at a faster clip than what you see in places like the US and the question is, if you're relying on that and the economy is facing headwinds, will there be deferred spending of, you know, some cases where they start stretching out those replacement rates? You know, I know for a extremely engineered place like Germany, that's probably anathema to their thinking, but it may be a reality that they face. And at the same time, you know, infrastructure in the, in the U.S. has received some tailwinds, quite honestly, whether it be infrastructure investment, Jobs act, there's greater focus on it.
We do see in our digital report that we released in Q3, Q4, 2024.
So just recently for the US you know, metering is a big chunk of the digital spend overall.
And like you said, we are seeing other companies, metering companies, whether it be Badgers Island. I mean, I think actually right before the holidays, Badger had acquired the majority stake in idrica, which is a Spanish company that it had partnered with and made an investment several years ago to kind of streamline its overall metering businesses and activities or at least help to do so. So. Well, we've talked a lot, a lot here. So is there anything else about Provincio's fit into deal metering's broader vision when it comes to digital water or anything else we miss? Let me leave it at that.
[00:27:10] Speaker A: Sure.
[00:27:11] Speaker B: Yeah.
[00:27:12] Speaker A: And I think you're right. I mean, we could sort of round out the conversation with that. And I think, just to close out the last point that I was making in terms of what you just posed about the US and facing these sort of tailwinds from IIJA and IRA and some of these other investment appropriations from Congress in the United States that definitely does drive a lot of this activity in the US Market. And if you look at that comparable to what's going on in Germany, Germany's faced measured as a percent of gdp, public investment in sort of critical services and infrastructure in Germany has been trailing behind a lot of other neighboring economies and partner economies as well.
So I think the fact that Germany is sort of in that heap of sort of that confluence of headwinds, as I've said before, is definitely not the most ideal situation for deal metering to be operating in. But to answer the final question here, as you said, what does this mean for deal metering and its broader vision? I think for one thing, this complements, as I said before, Deal's existing tools and the sort of predictive analytics piece that Provincial provides helps round out Deal's water loss management software as well as its IoT enabled devices like the Izarna Gateway solution that it rolled out not long ago and really builds out again this end to end solutions framework. I think you have a lot of companies that strive to build out what they call an end to end solution. It's sort of a lofty idea.
[00:28:57] Speaker B: Right.
[00:28:57] Speaker A: It's not always one that's easy to implement or strive towards. So I think you see Deal is really making real demonstrable steps in that direction with this Provincial acquisition delivering real comprehensive integrated solutions for utilities and industrial customers.
And then the last thing I would say again, and just sort of amid this uncertain, amidst this uncertainty, I think the Deal acquisition speaks to how do companies scale amidst uncertainty and elevated uncertainty that we've seen from for some time now. And metering emerges from these other segments that are facing significant headwinds from the German economy.
And I think it provides a foundation, this acquisition, at least for scaling analytics driven services and really points to how Deal can address some of these broader market challenges like water scarcity and energy efficiency.
[00:29:56] Speaker B: Yeah. So. All right, so then that was going to be my final wrap up question which nailed. I think just so I'm hearing this correctly and know if there's, I'm not putting this in any particular order, but I think your last point is a really good one. It's like how does a German company, how does it scale in times of uncertainty? Like you said, it's got the economic problems, got the Russia, Ukraine, which is impacting its other business. In fact, it's in many ways, you know, they could be, one could argue that they're seizing on this opportunity with the windfall from, you know, economically speaking, from Russia, Ukraine and defense spending. They're taking that money and reallocating it into a sector that like you said, has been growing 21% for them. And so they've expanded not all that long ago. They've got facilities in Illinois. The question is will they push harder and harder into the U.S. you mentioned that they're in places like Italy as well as Saudi Arabia and other markets. So how to scale in in times of uncertainty? And then maybe I'm, you know, double dipping here. And that is just geographic expansion. Right. The digital sector, we're at the early stages, relatively speaking, of the digitalization of the water market. It's a tough market to enter into selling when you're selling software, analytics, water utilities, they can't handle all of this operationally, financially in many cases. So metering is one thing they do understand. And smart metering is a way of doing something, you know, that they're already doing, but hopefully more efficiently while gaining something from it. They can help, they can capture billing data. So obviously if a utility is more efficient and using smart meters, you know, maybe the cost of that information collection is cheaper, it's more efficient. It also can, these meters can be used in more real time to understand leakage and what's happening there. So it's, it's something maybe closer to home than let's say digital twins. Right. You know, if you go straight from is, I think we've put it out in the past, past reports and analysis is sort of tactical decisions down to strategic and meters, you know, they're already replacing these and so the overhaul of metering systems is happening in any case from mechanical to smart and sometimes and there are other issues related to that. But I think I'm probably talking too much. But does that make sense to you?
[00:32:30] Speaker A: No, it makes absolute sense. I think you're right.
Again, just figuring out how does Deal hedge its bets in a way or hedge its risks and invest in high growth segments of its company? And metering is absolutely one of them.
[00:32:46] Speaker B: Yeah. And I think the other part of this, they, They've only had one M&A deal. Right. They've, you said they've got the partnership in Germany and then will we see more M and A picking up? It's been a little quiet on, particularly on the digital front, whether that's because of high interest rates, whether it's like you mentioned, Xylem had a, you know, a slew of, of acquisitions and now they're working with Edrica even more closely as of last month to coalesce that around, you know, a single package or you know, a solution.
So we'll see how that, how that plays out. But that being said, Mike, thanks a million and for jumping on the podcast and why don't you tell me, as I often ask, what are you working on that people can look forward to?
[00:33:38] Speaker A: Yeah, so right now I'm working on an insight report tracking and profiling some of the top engineering players. So around 35 of the top engineering players looking at sort of the revenue performance, some other strategic initiatives and activity that they've been doing and what they've been up to more broadly as of recently. So that'll be coming out and slated to come out sometime soon. So be on the lookout for, for that if you are a subscriber to the M and A and top company strategy service. And then also, like you said, I'm interested to see what the M and A landscape will look like as we enter this new year. Will it pick up and will it rebound, as so many pundits and strategists have said. So I'm excited to see what other deals are being made in the water sector from not only digital, but just other players more broadly, and excited to cover that and other research notes moving forward.
[00:34:35] Speaker B: Awesome. Okay. Well, Mike, thanks a million. Thanks for coming in early to get this, get this done.
I think. I appreciate it, but I'm sure all the listeners will as well. So I'll set you free on the engineering firms and we'll catch up later.
[00:34:51] Speaker A: Sounds good. Thanks, Rhys.
[00:34:52] Speaker B: All right, take care.
All right, that's a wrap for our 110th episode. So thanks for being part of the journey not only in 2024, but also we look forward hanging out with you in 2025. So once again, we're still excited about the coming year. I think we're always excited about the coming year and the future of the water industry and the innovations that lie ahead. So stay tuned for more discussions from people like Mike Miroff, but also a host of other analysts and expert interviews that I bring in here before we sign off. If you're in Boston, Barcelona, let us know. We'd enjoy the opportunity for a meeting.
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[email protected] until we talk again. Be well, be safe and take care.
Sam.
