[00:00:00] Speaker A: There's some concern that if there's enough disruptions, then utilities may just simply not get the chemicals they need. And it doesn't at that point really matter what the price is.
[00:00:15] Speaker B: I am Reese Diesel and this is the future of water, which we'll talk about all the ways which company's utilities and people are addressing the challenges and opportunities in water. Welcome to episode 102 of the Future Water podcast, and I know it's going to be a good one. That's because today I'm joined by Bluefield Research is Ethan Edwards. And Ethan, senior analysts at Bluefield has been doing some in depth analysis of m and A trends as well as industrial markets. And for this conversation we talk about his recent insights into TJC's acquisition of Us Alco, which is a chemical company with a focus on the water and wastewater sectors. Ethan and I in the conversation we're going to talk about private equity's role in the chemical sector, an upcoming IPO or two that we see on the horizon within the space. Also, we talk a little bit about approaches to recent supply chain constraints and how these companies are building in resiliency into their capabilities to address the challenges and once again, opportunities going forward. It's going to be a good conversation with Ethan, but before we do that, you're going to have to bear with me for a minute and let me talk about what's caught my attention recently. And why do I say bear with me? That's because this time I have two items. The reason for that is because I woke up early this morning to news from our european office that Indokore, a diversified private equity backed industrial company, has acquired Avaro from FFL Partners. So UK based Avaro offers a range of specific technologies and solutions tailored for the water sector, which we at Bluefield, we know a fair amount about. We've done a lot of work with Avaro. We know a lot about the company, its markets and where it's going. But I think its offerings include everything from telemetry and Scada systems, leak detection, including Avaros permanent and Eureka, three products it has. Our pressure management application I know is used for optimizing pressure levels across water networks, preventing bursts and extending asset life, addressing things like non revenue water. It also has event management and analytics solutions as well as remote asset management tools. But why do we really care about this other than the fact that it's a varro? Well, let me start with Indicor was formed in 2023. Not a lot of people know about Indicor. And the reason for that is like I said, it was just formed in 2023 following the sale of a majority stake in a portfolio of industrial businesses from Roper Technologies. So Roper Technologies sold the majority stake to Clayton, Doyle and Rice which is a private equity firm and CDNR is all called theme now holds a controlling interest in indicor with I believe Rover technologies still holding a minority stake. But Robert Technologies for what it's worth, they also own Neptune Technologies, the metering company which some of you may have heard of. So I thought this is really interesting. Also CDNR, they were a prior owner of core and main so they're interesting to see what CDR will do with this business. To that point Avaro seems to be adding to indicore stack of related solutions. Indicor also owns technolog which seems to have I dont know if its direct or overlapping offerings with Avaros, so Indicor seems to be doubling down in some respects. Technolog has references all over the world, from South Africa to Ecuador to the US. So itll be interesting to see how that plays out. Which is the segue to my third point. And that is Avara strength is in the UK market. Clearly Nicor is looking to apply avara solutions to other markets, including the US I would imagine. So itll be interesting to see how that plays out. Nonetheless, its worth continuing to look at the UK market. I want to give a shout out to my colleague Chloe Meyer who not only just released a report on the UK market and whats happening in that geography, but also give a shout out to her because she was on the last Future Water podcast, episode 101, in which we do talk about the UK market. So if you want to get the abridged version over your phone and through a podcast, go back to episode 101. So in other news, sort of changing gears a little bit, but perhaps a good follow up to the Indokoro Vara deal. And that is Bluefield has just released its us digital water forecast. US and Canada digital water market outlook. This includes everything from key drivers competitive shifts. Well it's forecast out to 2023. Cross apologies for not knowing the exact number. 20 or 30 different segments within the digital water space across the US, state by state, US and Canada that is. But really, why should the water industry care? Why should you care? Hopefully it's because the digital water market in North America is on track to more than double, from 11.5 billion in 2024 to almost 24 billion in 2023. This is going to be driven by a push for more efficient, data driven infrastructure behind that. So I think over the course of that forecast period were looking at about 8.5% compound annual growth rate. And its going to look at, or its going to be driven by things like smart meters, ScADA systems and AI powered analytics, among other things. Another reason why it's of note is emerging technologies and cybersecurity. Cloud based platforms like AI and machine learning seem to be transforming data handling, predictive maintenance and asset management within utilities. But with increased digital integration, cybersecurity risks are going to be a lot higher. And I think everybody sees that coming down. The hype, pun intended. Utilities, water and wastewater utilities are expected to invest heavily into security, with spending on cybersecurity projected to grow seven, seven and a half percent through the forecast period. Now, it's growing from a pretty small base, so let's be honest here. But it is a topic du jour and it is a real threat. So cybersecurity raises a lot of red flags or alarms for utilities and their procurement decisions when it comes to technology. So definitely something to think about and to consider. Another area of note within the report that our team of digital analysts take a look at, and that is workforce challenges accelerating adoption so of digital technology. So with workforce shortages caused by high retirement rates, there's been a difficulty in attracting new talent to utilities and operations.
Utilities are in some respect turning to digital solutions to solve their problems. This includes everything from automation, remote monitoring, and other data driven systems that really becoming essential. The shift not only fills a gap of workforce gap, but it's also driving a fundamental transformation, making digital technology adoption partly a survival strategy in some cases. This is one of the ongoing challenges. But I think even within the workforce itself, by adopting these digital solutions, it also transformed the type of hiring thats going to have to take place at utilities going forward. Theyre going to have to be, at least within the back office, more data driven, technology focused, data management focused than they have been in the past.
I think my last point, among others that I wanted to share, ive got a long list here, but im going to cut it short for the sake of time. And that is the rise of SaaS and subscription models, the shift from capital heavy investments to subscription based models like software. As a service, it's also transforming the way utilities are managing their assets and operations. SaaS models ideally reduce upfront costs, particularly benefiting smaller utilities and allowing them to implement advanced digital tools that otherwise might be out of reach, partly because of, once again workforce personnel and resources available to them, but also the upfront capital thats going to be required. So itll be interesting to see how this unfolds. There are a number of different companies. There are different approaches, should I say, that are being deployed by these companies to target the big utilities. Everybody can go whale hunting for the big hundred thousand population served and more. But then theres tens of tens of thousands of water and wastewater utilities that serve much smaller populations that are in many ways in greater need for support. They have less employees. They have less capital available to them. This is not a knock. Theyre less sophisticated financially in how theyre dealing with things. So theyre going based off experience. So if people, and there are companies out there that are targeting this segment, the tier three, four, and five systems out there, that theres a huge opportunity for improvement, and they are probably the most exposed to risk, whether that be regulatory risk, whether that be technology risk, whether that be infrastructure risks or some cases climate risk. I could go on and on about this report. Its a good one. If youre interested in it, feel free to visit bluefieldresearch.com dot. Its right there on our website. You can buy, buy it off the shelf. You can also just go to our contact page and reach out to us and perhaps we can set up a conversation and see, you know, how we can help you see what you're looking for and address some of your questions. So two good things to talk about this week, indicor Biosavarro and Bluefield research is recently released, just recently released digital water forecast over the next decade. So give us a ring if you're interested. That being said, let's get to Ethan Edwards and talk a little bit about m and A in the chemical sector.
All right, so I'm joined here by Ethan Edwards. Ethan, how goes it?
[00:10:41] Speaker A: Pretty good. It's the start of fall in Boston, so there's a lot of excitement that comes with that.
[00:10:48] Speaker B: Well, we were just talking about it before we started recording. You've got a marathon coming up in about a month. But as you said, I'll use your words exactly, sadly, quote unquote, you've done enough of these, is the logistics and the planning aren't what they used to be, but you still do them. So good on you, I suppose.
[00:11:08] Speaker A: Yeah, not as much as there used to be that, but I guess there's still enough adrenaline and still enough of a high in the race that keeps me coming back.
[00:11:18] Speaker B: Well, I guess best of luck to you. I'm not going to. It's too late for me to start running marathons at this point. But that being said, you've been doing some research, put some together on TJCs recent acquisition of us Alco. So why dont we just start with the basics like we do often, and that is lets talk about its significance and sort of the broader water treatment chemicals market and give us a little bit of the detail.
[00:11:42] Speaker A: Yeah. So this deal happened last month from the time that were recording this podcast on August 5, 2024. And it is the biggest deal that we've seen so far in the water sector. So TJC, they sold USalco to HIg capital for an estimated $2 billion. And USalco, they're Baltimore, Maryland based. They manufacture and they distribute water treatment chemicals, primarily coagulants and flocculants, to municipal utilities. So those are chemicals that are used to filter out suspended particles from surface water. So anything where you're pulling water from rivers, lakes, reservoirs, that's what they're using in one of the treatment steps. And so both private equity firms, they've bought and sold companies between the two of them before and they're both active in the water market. So hig capital, they have their own united flow technologies water platform and then TJC. In the past, they've owned census, first buying in 2003 and selling nearly 13 years later in 2016. Asylum for around three times what they bought it for after adding a couple acquisitions in.
[00:12:58] Speaker B: Yeah, I think the, I mean, that I didn't even realize that the TJC owned census or if I did, I forgot about it. One, it's been a while and now in my mind, it's been a while since Xylem picked it up. So that's actually pretty interesting. But I think to your point, this is a $2 billion deal, and by that, its the biggest deal weve seen this year. I dont even know if we saw one that big. Even last year, there was a bit of a wave of big deals a year or two ago and just m and a as a whole has been down. But hopefully, or seemingly it looks to be picking up. But us, Alco, when we talk about them, its growth, speaking of acquisitions, its been driven largely by acquisitions since they picked it up in 2020. How has that strategy shaped the company's footprint? I guess in the US primarily, particularly in water and wastewater.
[00:13:51] Speaker A: Yeah, I mean, we've kept an eye on them since they've been acquired. And when the acquisition was announced, I think that was one of the main things that stood out to us was just in addition to their massive deal size, biggest this year essentially was also just their growth under hig over the last four years. So I think Hig had bought in essentially in June 2020 and then under their backing, as you could say, they essentially tripled their manufacturing and distribution facility footprint in the US and then really went from being a regional player east of the Mississippi to a national player. So looking at some of the different deals that they did at that time, I would say the most transformative move was a merger in 2021 with g two O technologies, which added around 15 facilities to Usalco.
And looking at the landscape now, looking at the top ten, Usako roughly fits in that fourth spot in terms of the size distribution scale of their locations behind Solanus, the market leader, which is owned by Platinum Equity Hawkins which is publicly traded, and then Univar Solutions, which is also private equity owned by Apollo. And it looks like they're still growing. They've announced a couple new production plants in California and Arkansas as well.
[00:15:17] Speaker B: Yeah, I think it's interesting when you look at the other companies you mentioned, Solenes and Univar specifically they're owned by private equity. So let's talk a little bit about private equity in the role of PE firms in this space.
So, well talk about TJC and Hig. What is the role that private equity has played in consolidating water treatment chemicals market and why is this consolidation happening? Seems to be at a pretty good clip. So yeah, whats the role theyre playing?
[00:15:49] Speaker A: Yeah, well if you look at private equity firms in water in general, theres definitely interest in getting in if theyre not already in. Oftentimes it's a pretty similar playbook, buying into a growing space, buying and rolling up companies and then exiting hopefully at a higher valuation than they bought in for. But when we zoom in on the water treatment chemical space specifically, I would say it's a little bit more nuanced because it's arguably not growing as fast as some of these other more mercurial growth segments or verticals that we're talking about. We have it as a $7 billion market in the US that's growing a little under 2% a year.
There's some limited growth expectations there. Arguably it's a high floor in that these chemicals are always going to be needed at municipalities and industrial facility sites, but a low ceiling in some ways with the growth. And so Usfalco in particular, they also have significant exposure to municipal treatment sites instead of industrial. That also potentially could weigh on that growth expectation. So that's the backdrop. And then I would say that it becomes clear with that limited growth that the growth is really coming in organically. Whether it's buying competitive or buying competitor companies or building new production facilities, that's sort of the capital to grow the valuation. And when we look across the top ten players in the space, pretty much every private equity backed chemical manufacturer has grown inorganically in terms of rolling up the space, consolidating the space faster than their publicly traded peers over the last four years. And when we look at the competitors, the one exception is Hawkins, which has completed eleven acquisitions. But when you look at the others, I think we start to see that there are potentially different priorities there. A lot of them are diversified players like Veolia and ecolab that do water treatment chemicals but do a whole bunch of other things in the water space as well. So maybe their priorities arent there.
[00:17:59] Speaker B: Yeah, I thought one of the, I mean, you touched upon something about sort of the growth. I mean, as we all know, the water wastewater sectors are pretty mature, well established. So I know one would think that private equity is looking for some uplift because theyre going to get in the deal and then out of it at some point, say five to seven years. I think the other thing is just, theres a little bit of nuance weve also seen is theres slight difference between, maybe youre touching upon this, the industrial sector, which also has demand for chemicals as well, versus the municipal side. And so I know some of these chemical companies, they play in both and some are weighted more in one direction or the other. So I think thats something worth looking at or understanding at least. So interesting. Appreciate you bringing that up. The other thing thats also been happening over the past couple of years, apart from COVID and just the craziness, and there are inflation and market or supply chain disruptions that are impacting chemicals. I remember having a conversation with, it was on a panel with the CEO of, I think with essential utilities, and we were talking about challenges that they were facing a couple years ago at least. And one of the things that came up was chemical. Chemical prices for water or wastewater treatment were through the roof and they were causing all sorts of operational or opex pressures on the utility, essentially utility zones Aqua America. And so they've got a bigger footprint than just one state or one utility at that, costs are rising and it seems, I think our numbers show that chemical costs are still 27% above pre pandemic levels. So how are these chemical producers managing those ongoing cost pressures? What are they doing? And is there anything that they could do differently or even these private equity owned companies are doing to bolster profitability?
[00:20:00] Speaker A: Yeah, I mean, its a good point on the costs. And I would point out that its really not just prices in general. Theres just an overall concern about supply chain security that AWW has looked at in the last couple of years, looking at how vulnerable are water utilities in the United States to supply chain disruptions, whether its from trucking or rail or overseas freight, potentially. Theres some concern that if theres enough disruptions, then utilities may just simply not get the chemicals they need. And it doesnt at that point really matter what the price is. But looking at the cost, which is ultimately what the producers and manufacturers are more in control of, I would say that the key is in scale. So scale can help them drive down costs and then manage market disruptions where they can. So in certain scenarios, its out of their control. USalco, for example, their Baltimore headquartered, and then this year in March 2024, totally out of their control. They saw the Baltimore Francisco key bridge collapse. And with the manufacturing and headquarters there, that's definitely impacted their logistics, especially in that eastern seaboard area. So you've just got general uncertain market conditions, and then you're trying to sell to a highly risk averse utility, consumer base. So managing all those challenges through scale and just service quality overall is what theyre targeting.
[00:21:31] Speaker B: It seems like also, I mean these acquisitions, like you said, theyre also, I think the word you were talking about, resilient supply chains, I think one part of that also is you can also put a pin in a map and is there like a radius that you can draw around. So for distribution channels to various customers, it seems like thats what these acquisitive companies are doing at least. So I think youve put out a footprint. How many manufacturing facilities do we have on the map? We track for chemical companies. We put it together in research.
[00:22:01] Speaker A: I don't remember, for coagulants and flocculants, I believe it's around 200 total. I have to read the research note. There's a figure on it. But Usako, they have around 33. And it's definitely important. I mean, the cost of shipping these heavy chemicals, since they're usually in the liquid form, is pretty high. So I think they say there's around a 300 to 500 miles radius that you can reasonably do it from the manufacturing to distribution site to end user.
[00:22:33] Speaker B: Yeah. And I know that our team on the consulting side, we've been working with some companies talking about chlorine, right. Actually not just environmental risk, but the human or community risk to moving chlorine around the country in tanks, whether it be on trucks or rail and what that potentially means. So there are other technologies that are trying to hit that market niche, if you want to call it that, and offer different solutions that are less risky. So, looking forward, what can we expect from the chemical sector going forward, and are we going to see more deal flow? What are your expectations?
[00:23:10] Speaker A: I would expect so, so looking at this segment in particular, before we zoom out, just the treatment chemicals, coagulants, flocculants, there are a lot of companies that operate just one, two or three facilities that I imagine are of the main targets to be rolled up. So over 120 of them operate one, two or three facilities. So I'd say there's consolidation expected there. And then in the chemical side as a whole, I would say that sentiment is improving slowly. So it'll be interesting to see how supply chain insecurity continues to be resolved, both domestically with bridge and rail issues and then internationally, where you still have Red Sea conflict causing issues with the Suez Canal. So the chemicals industry will be, especially within water treatment will be exciting to keep an eye on. And then I would say with overall deal flow, its definitely been more recessed this year than weve expected. I mean, there are plenty of reasons for that. Interest rates staying higher than expected, I think were also at that time point. Now, wherever, maybe still early on, but we're getting into that timeframe where companies that bought in at cheap interest rates could be looking at exiting, but the valuations aren't matching their expectations. So, yeah, it'll be interesting to see how those trends play out. And maybe even in the chemical sector specifically, you have a lot of these different big companies like Salenis, for example, that might be looking for an IPO and the next year or two, and itll be fascinating to see how the market responds to that in terms of valuations.
[00:24:52] Speaker B: Steven? Yeah, I think if interest rates improve, I think the expectations are that deal flow will pick up. And your point about salinis will be interesting. Theyre interesting player, which I think we were talking a little bit about this yesterday. There was some expectation that they would be interested in us, Alco as well.
I look forward to tracking that in that market as a whole. So with that being said, it sounds like the role, when I listen to what youre saying here, and also the research note that you put out to clients recently on this deal, specifically private equity, is playing a bigger role. Supply chain issues within the chemical markets seem to be subsiding a little bit. Therefore, thats to the benefit of the end user and customer. I would expect that prices will come down a little bit from maybe their Covid or pre Covid highs whenever that was. And then lastly, I think your point is a good one. So some of these companies, whether it be Apollo or TJC, they just got into it in this case, but there could be some big deals to come down the road in the future. It'll be interesting to see when and if they exit over the next five to ten years in some cases. So that being said, what else you get? What else you're working on these days?
[00:26:16] Speaker A: Well, the most immediate thing is we will be having the webcast next week. I believe it's next Thursday. So by the time that this episode drops, it may be a day a couple days before. So if you arent signed up for that, definitely register. You can always find the recording on the website. So stay tuned for that.
[00:26:38] Speaker B: In that case, were looking at, if you want to call, a high tech sector. So were looking at the market for data centers. Whats happening with the water management there as well as semiconductors? Those are two segments that a lot of clients and other people in the industry have been asking about because one facility counts for data centers is everybody knows in demand is going up. So what does that mean for water management? But then the other part of that equation, if you will, is that theres a lot of money flowing into the semiconductor space, at least supposedly. But if you keep reading news about intel, itll be interesting to see where, when and how that goes in the future. So look forward to that. Yeah, I think. Thanks for bringing that up. Thats a really good point. So this podcast will drop on Tuesday, usually Tuesday morning, midday, I think. And then the webcast is on Thursday. So if you're interested, just go to bluefieldresearch.com and you can get some more information about that webcast. Awesome. Well, Ethan, thanks a million and happy running. How about that?
[00:27:42] Speaker A: Yeah, sounds great. Thanks for having me on.
[00:27:44] Speaker B: All right, man, take care.
All right, well, that's a wrap for our 102nd episode. So thanks for once again being part of the journey. We're excited about the future of water industry and the innovations that lie before us. So stay tuned for more insightful discussions from other Bluefield colleagues like Ethan Edwards to hear what they have to say. I can't tell you about how much he knows because just before jumping onto this podcast, we're talking a lot about the semiconductor industry as well, and all the ins and outs of the facilities, the discharge rates, whether they're discharging to water, wastewater or wastewater utilities typically. So got a lot of information, and Ethan's a big help on that, as he is on this recent research note that he put out. So here's to the uh, next what would that be, 97 episodes after this before we get to 200? So we just celebrated our 100th episode a couple weeks ago. So if you're interested to listen to number 100 with Keith Hayes or any of the other ones before that, you can always go to Apple Podcasts or Spotify or whatever podcast platform you use. So before we sign off, if you're in Boston Barcelona, let us know. We'd enjoy the opportunity for a meeting. Also, if you're in New York for Climate Week and they're rethinking water event at Columbia University on the 24 September, let us know because I'm going to be there. It looks like I might be hosting a panel at rethinking water. We're still working on the details. No promises. Then we'll also be at Weftech a couple weeks later. Please subscribe to the Future Water podcast and give us a review. Send us a
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