Ecolab's big water deal

Ecolab Inc. took a giant step toward becoming a bigger player in the global water-treatment market with an $8.1 billion deal to acquire Nalco Holding Co., the world's leader in industrial water services.

The transaction would be the biggest by far for St. Paul-based Ecolab in its 88-year history, and would result in a company with $10.4 billion in sales, 100 plants and 39,000 employees in 160 countries.

"This combination creates a great growth powerhouse," CEO Douglas Baker said in a Wednesday conference call with analysts. "We are combining two global leaders with complementary strengths." Ecolab is best known for its sanitizing and pest elimination products for hospitals, hotels, restaurants, schools, car wash and laundry services.

Naperville, Ill.-based Nalco has water treatment capabilities for light and heavy industrial companies, paper manufacturers and the oil and gas industries.

The cash-and-stock deal includes assuming $2.7 billion in debt. The $5.4 billion for Nalco's stock works out to $38.80 a share, 34 percent higher than its closing price Tuesday. Nalco's stock jumped to $35.87 a share on news of the deal, though stayed well under the offering price.

Ecolab shares fell more than 7 percent, a sign some investors considered the price too high. While most analysts on the conference call congratulated Ecolab on the deal, some noted that shareholders might perceive the deal as risky, because Ecolab has consistently shown strong growth on its own. Others mentioned Nalco's growth problems in Europe, weak balance sheet and a previous attempt to sell itself several years ago.

One analyst expressed concern that Ecolab is entering some markets that have struggled with volatile commodity pricing, a concern Ecolab officials were quick to dismiss. Nalco CEO Erik Fyrwald, who will become Ecolab's president under terms of the deal, noted that his company faced no financial risk from the disastrous 2010 BP oil spill in the Gulf of Mexico.

"It's a full-value deal," Andy Adams, vice president and investment manager at Mairs & Power, said of the hefty premium. The St. Paul investment firm is a longtime holder of Ecolab shares and earlier this year began buying stock in Nalco.

But Adams said he believes Ecolab, which had been looking at acquiring Nalco for a long time, has done its homework. He and others said the deal is a solid strategic move for several reasons. The deal gives Ecolab a significant boost in industrial and energy-related markets.

"Energy is probably the biggest growth opportunity, with Nalco's products for oil clean-up and exploration, including deep-sea drilling and shale drilling," Adams said.

Nalco also has a bigger presence in Asia, and the deal will boost Ecolab's business in Asia from about 15 percent to some 20 percent of its total revenue, he said.

"These are two premier companies -- pretty much Number 1 in each of their markets, and the combination creates a very large company with access to megatrends in water conservation, water quality, energy reduction and environmental management,' said Nate Brochmann, an analyst at William Blair in Chicago. Both have solid customer bases, and the combined entity should generate about 90 percent of its revenue from repeat business alone, he said.

Surprise move

Blockbluster deals aren't the norm for Ecolab, whose biggest acquisition was in 2001 when it paid $430 million for a partner's 50 percent stake in a joint venture in Europe.

"Size-wise, this deal is something of a surprise, but from a strategic standpoint it's not a surprise at all," Brochmann said. Ecolab has aggressively pursued acquisitions to enter or significantly expand its presence in certain product markets, he said. An example was its $275 million purchase of Microtek Medical, which greatly expanded Ecolab's health care business. The company also has demonstrated a growing interest in water-related businesses, including its 2008 acquisition of Ecovation, a manufacturer of wastewater treatment systems for the food and beverage industries.

Brochmann said the price seems fair. "It's about in the middle range of premiums being paid for acquisitions in water-related markets," he said.

CEO Baker noted that water treatment is becoming increasingly critical around the globe.

"Fresh water is becoming a very scarce resource" and yet is increasingly critical to exports, food and beverage safety and agriculture, Baker said. The merger "sets us up to take advantage of the core megatrends affecting the world, trends like growth in food demand and the food safety challenges that come with it."

Ecolab will use $1.6 billion of cash and issue 68.9 million additional shares to finance the deal, which is expected to close in the fourth quarter. Nalco's management team will move to St. Paul by the end of the year and will work to enhance cross-selling between the two companies.

Ecolab said it expects the combination to result in annual savings of $150 million as back offices and plants are merged and duplications eliminated. Baker insisted the deal was about growth, not cost cutting. No sales positions or research-and-development posts will be eliminated as a result of the merger, he said. In fact, the company will probably broaden its staff in those areas, he said.

Ecolab said it will announce second-quarter earnings July 27 and expects earnings-per-share of about 64 cents, up from 56 cents a year ago.

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