Ecolab completes Nalco deal

Ecolab Inc. took a significant step Wednesday toward becoming a large player in the water management market as it closed the biggest acquisition in its 88-year history.

An $8.3 billion deal for water services giant Nalco Holding Co. was approved by shareholders of both companies and subsequently received regulatory clearance.

The combination will create a company with more than $11 billion in sales and more than 39,000 employees in 160 countries.

Ecolab, known for its sanitizing and pest elimination products, already has water-related businesses that accounted for about $150 million of its $6.1 billion in sales last year. But in a recent interview, Ecolab CEO Douglas Baker said the addition of Nalco will increase Ecolab's market opportunities from about $57 billion to more than $100 billion.

"Water has been an undersized opportunity for Ecolab," said Andy Wittman, an analyst at R.W. Baird. "Now it becomes very material."

About 40 percent of Ecolab's 2011 sales will come from Nalco operations. Nalco's customers are industrial companies, paper manufacturers and energy services firms. Until now, Ecolab has focused on food and beverage companies, restaurants, hotels, laundries and hospitals.

While there's little overlap, they have much in common. "Cleaning is basically water treatment," said Baker, adding that the biggest misconception has been that the businesses are dissimilar.

He said Ecolab entered and expanded its own water-related business in the last decade because most of its cleaning products won't work without water, and customers increasingly asked for products and services that address water scarcity.

Baker said the companies can learn from each other. Ecolab plans to adopt Nalco's program for training customers on how to use its systems safely.

"We're good at it, but they're much better," Baker said. Nalco's sales teams will model their programs for managing large customers after Ecolab's. Nalco's senior management will move to St. Paul and Nalco CEO Erik Fyrwald will become the president of Ecolab.

Ecolab stock fell 7 percent the day the deal was announced, but Wall Street has gradually warmed to the idea of the merger. The shares have recouped that decline, recently trading at around $55 a share.

Based on Wednesday's closing price of $57.02 for Ecolab stock, the cash-and-stock deal works out to a price of $39.60 for each Nalco share. Nalco closed at $28.87 a share the day before the deal was announced in July and has moved up steadily since then. It closed Wednesday at $38.75 a share.

Jeff Windau, an analyst at Edward Jones in St. Louis, said he has concerns about Ecolab taking on added debt. "I've always liked the market opportunity," he said of the move by Ecolab to expand in water-related markets. "The things that concern me are more the risks of added debt, integrating a big acquisition in this economic environment in the U.S. and the current debt crisis in Europe."

Ecolab expects the combination to result in annual savings of $35 million next year and $150 million by 2014 as back offices and distribution operations are merged and duplications eliminated. It has said that no sales, service, research or product development posts will be cut; in fact, some of those staffs might be expanded.

Besides boosting its water business, Baker said the acquisition will help Ecolab meet other long-term growth goals such as increasing its presence in emerging markets. Nalco has a larger presence in Asia, and analysts estimated that the deal will boost Ecolab's business in Asia from about 15 percent to about 20 percent of total revenue.