Why Ecolab must undo a deal that's already complete

Last December Ecolab announced the completion of an acquisition that seemed to fit the definition of no big deal.

The name of the acquired company, the Holchem Group Limited, didn't show up in Ecolab's last annual report filing, while the press announcement described 2017 Holchem sales of just $56 million. Ecolab last year had revenue of about $14.7 billion.

Yet Ecolab's purchase of Holchem was a very big deal in the food and beverage business in the United Kingdom — so big that Ecolab's combination with the top player in its cleaning-products market niche just was effectively killed by a U.K. regulator over fears that Ecolab's new market power would hurt customers.

The acquisition didn't turn out to be merely a waste of time for Ecolab, a deal that failed to close. Instead it's a closed transaction that now has to be reversed, turning a promising opportunity into a sizable hassle.

And even though the numbers are small for a company of Ecolab's size, the story provides a fascinating glimpse into a problem that big companies like Ecolab might continue to have as they keep trying to grow in their main lines of business.

Where these companies are big already, there might not be much opportunity left to get bigger. They're going to have to find other ways to grow besides looking for well-regarded competitors to fold into their traditional operations.

As you would expect, given that Ecolab earlier this week said it's still reviewing what to do about this problem, the company declined to discuss it.

Ecolab does have an active acquisition effort, though, last year spending about $225 million on deals.

The managers of Ecolab's business in Europe would certainly have been in a position to tell anyone at Ecolab headquarters in St. Paul what kind of opportunity the Holchem Group represented. In the U.K., Ecolab and Holchem competed head-to-head for the cleaning and sanitizing chemicals business of food processors, dairies and beverage producers. The two were among the four meaningful players in this business, with the remaining players serving small slices of the market.

Ecolab had a big corporate account focus, serving multinational companies that already had Ecolab on their approved supplier lists and just happened to have facilities in the U.K. Holchem, the top player in the market and based near Manchester, did best with U.K.-based customers.

The findings and documents in the regulatory inquiry of the Competition and Markets Authority (CMA) tell a story that makes it easy to understand why both sides could have seen bringing the companies together as a great idea, provided they could agree on a price.

For one thing, sales growth is hard to come by in this market. Food processing and beverage bottling are stable industries, and to grow you either have to take customers away from your competitors or hope your own customers get bigger by buying up their rivals.

When customers do consider switching suppliers, it's often through an open bidding process, with price and other terms typically specified right up front.

For Holchem, described as having been owned by several individuals and family trusts, it couldn't have been worry-free to keep going toe-to-toe against a global giant from the United States, with a research-and-development budget and other capabilities that the smaller company could never come close to matching.

For Ecolab, Holchem was easily "the strongest competitive constraint" in the market, as characterized by the CMA. If combined under Ecolab's ownership, they would then account for 30% to 40% of the market and become maybe twice as big as the next biggest player, with Ecolab's share in the food business jumping. Further, there could easily be products and processes Ecolab could take from Holchem to its other European markets.

The response to the CMA by Ecolab — which has owned Holchem this whole time, even though it was operated as a separate entity — questioned many of the CMA's conclusions.

Ecolab acknowledged that the two firms competed, of course, but Ecolab claimed that they weren't the fiercest of rivals, given that Ecolab had many multinational customers that Holchem couldn't even bid for. And Ecolab pointed out that it was easier to lose a customer, or at least part of the business, than the CMA seemed to think, and as a combined company they would still be battling very capable competitors.

Looking back, and not that anyone in the Twin Cities outside of Ecolab was paying attention to news like this, it didn't look good for the company last spring when the CMA decided to take this deal through a much more in-depth review process.

If Ecolab really has no good options other than simply complying, it will have to sell. And finding a buyer for Holchem doesn't seem to be an easy assignment. Ecolab created an anticompetitive situation by combining its business with Holchem's, at least according to the CMA, so how would selling Holchem to either of the other big players in this space avoid that problem?

It's important to note, though, that this is Ecolab's problem to solve, not the former owners of Holchem. They will still have Ecolab's money.