Ecolab makes a bigger splash

Ecolab Inc.'s $8.3 billion deal to acquire Nalco Holding may look like a plunge into unfamiliar waters, but CEO Douglas Baker insists the St. Paul maker of sanitizing and pest-elimination products isn't in over its head.

The transaction that closed last week after getting approval by shareholders of both companies will dramatically change the makeup of Ecolab, a Fortune 500 company with sales of about $6 billion last year.

With Nalco, Ecolab's sales will skyrocket to about $11.3 billion in 2011, and about 40 percent of the total will come from the Naperville, Ill.-based company. Nalco, a world leader in industrial water services, will put Ecolab into new markets like paper making and oil exploration and refining.

The cyclical nature of those businesses is different from Ecolab's traditional customer base of meatpackers, bottlers, dairies, grocers, hotels and restaurants that are more closely tied to consumer spending.

But at the core, many of Ecolab's customers are involved with food -- processing it, storing it, serving it. That is the sweet spot where Ecolab can benefit most from Nalco's broad expertise in water technology.

"In parts of the world water shortages are at a critical stage, and it's gotten in the way of our customers' ability to operate and expand," said Baker, who sat down with the Star Tribune for a recent interview. Their needs are widely varied and include reducing water use, controlling contamination, recycling and treating wastewater.

Baker estimates that half of Ecolab's customers -- mostly food-related businesses but also health care facilities and laundries -- have water needs that could be filled with Nalco products.

"Anytime you can get customers to open their wallets more, you're ahead," said Jeff Windau, an analyst at Edward Jones. "You're getting a bigger return on your relationship with them as customers."

Ecolab this year had sales of about $150 million from its water-related business. It has estimated that revenue just from cross-selling between the two companies could total $500 million by 2016.

Ecolab isn't the area's only large company looking to expand in the market for products that address the growing need for clean, accessible water. Golden Valley-based Pentair Inc. has bought more than a dozen businesses in recent years to create a $2 billion water division. 3M Co. entered the water-filtration market in 2005 when it bought Connecticut-based Cuno Inc. for $1.35 billion -- even today the largest acquisition for the Maplewood-based company.

Wall Street's initial dim view

Baker said Ecolab customers were quick to recognize the potential advantages when its deal for Nalco was announced this past July. "We heard from many of our customers. They said things like 'Thank you for thinking big,'" he said.

The market's discomfort with big deals is well-established, especially for a company like Ecolab, which typically doesn't do them. Baker said he was ready for the stock's decline. "You can be told that someone is going to punch you in the stomach, and you can expect it. It still doesn't feel good when it happens," he said.

But the deal's size was only part of the reason for the market's negative reaction. "Ecolab has always been pretty steady, even in bad economies. The concern with Nalco is that with markets like energy, it's more volatile," said Andy Wittmann, an analyst at R. W. Baird.

Some analysts also thought Ecolab's cash-and-stock offer was too high and were concerned about the added leverage on the company's balance sheet. The transaction includes the assumption of $2.7 billion in Nalco debt.

Companies typically go on road trips to market pending deals with the investment community, but Ecolab's campaign was especially aggressive. Baker spent 12 days on the East Coast shortly after the transaction was announced meeting with analysts and investors. He and other Ecolab executives also made the rounds of industry conferences to explain the deal's merits.

The shares began climbing back in late August and may have been helped when an investment firm controlled by Microsoft Corp. co-founder Bill Gates added to previously acquired holdings, making him the largest stockholder in Ecolab. "Most investors consider themselves independent-minded, but I'm sure it had some influence," Baker said.

"It took awhile for the market to change its mind-set," Wittmann said. "Markets like energy are more volatile, but they're also attractive because they're growing more rapidly than some Ecolab markets." He said Ecolab has effectively made its case that with internal growth and smaller acquisitions in water-related businesses, it had laid the groundwork for the big Nalco deal.

Documents filed with Securities and Exchange Commission (SEC) show the companies have long had an interest in each other. On several occasions in the past 10 years they discussed business relationships like joint ventures.

In 2003, one year before Baker succeeded Al Schuman as CEO, Nalco asked Ecolab if it wanted to acquire the company. "That was a little like dialing for dollars," said Baker, alluding to the private equity firms that owned Nalco at the time and were looking to cash out. They did in 2004 with an initial public stock offering that left Nalco with a heavy debt load.

The SEC filings say conversations that led to acquisition negotiations began in January. Baker first suggested an information-sharing arrangement to Nalco CEO Erik Fyrwald and a couple of months later shifted his focus, proposing the merger.

Baker said it's unlikely Ecolab would have pursued a deal this size a few years ago despite the solid strategic fit. The depressed stock market had hit Ecolab's shares, devaluing it as acquisition currency. And like many companies, it was working to conserve cash in the midst of the recession. In 2009 it laid off about 1,000 people, or about 4 percent of its worldwide workforce. It also closed some plants and distribution facilities sooner than it originally planned.

According to the SEC filings, one reason early discussions on joint ventures and other collaborative arrangements didn't pan out was because the companies couldn't agree on management control. The merger settles those issues. Baker remains CEO while Fyrwald will become president, overseeing water services for the industrial, paper and energy businesses on a team that includes several Nalco executives. Plans call for Nalco senior executives to move to St. Paul, but Nalco will continue to have operations in Naperville.

About a month after announcing the deal, the companies each appointed 25 employees to work with each other on integrating their operations. Some, like Ecolab vice president Nick Bognanno, are among the dozens of employees who have worked for both companies at various times in their careers. He said that shared experience is helping the integration process.

Susan Feyder • 612-673-1723