The Gulf Time Newspaper One of the finest business newspapers in the UAE brought to you by our professional writers and editors.
Biotech, social media and cryptocurrencies are the usual hotspots for crazy asset prices. This year, though,
one of the highest valuations offered in any US acquisition is for the sewer system of a tiny township in Pennsylvania.
NextEra Energy Inc, the world’s biggest utility by market capitalisation, announced in June it was buying the wastewater system of Towamencin township, a community of some 18,000 people about 30 miles north of Philadelphia. The price, $115 million, made it pocket change for a company valued at $169 billion. But at 21 times revenue, NextEra offered a higher multiple than all but two US deals announced this year, both of which were in biotech.
This raises questions. Why is an electricity and renewables powerhouse paying a tech-like premium for roughly 8,000 sewer accounts in some patch of Pennsylvania? And why is this township selling its biggest asset in the first place? The answers blend strategy, state privatisation laws and small-town politics — and the profits to be made in water.
The US water and wastewater sector is a giant made up of Lilliputians. Of those Americans relying on centralised pipe networks — as opposed to private wells or septic systems — about 85% are hooked up to municipal systems, according to Bluefield Research, a Boston-based water intelligence provider. These can be enormous, like New York City’s, but most are small, like Towamencin’s, or even tinier. This doesn’t leave much market share for private companies. The market cap of the entire listed water utility sector is only about $50 billion, less than one-third that of just one electricity utility: NextEra.
This is one reason why a company such as NextEra would likely be interested. (The company declined to comment). Fragmented industries delivering vital services make rich hunting grounds. Another attraction may relate to credit. NextEra derived 59% of its earnings from regulated utility operations in the 12 months ended in June and 41% from its unregulated business, mostly contracted renewable energy projects. As noted by CreditSights, which calculated the figures, credit rating firms would prefer regulated operations to be at least 60% of earnings, since charging utility bills is akin to collecting taxes. Yet NextEra’s renewables business is growing at about twice the rate of the utility operation, meaning that ratio will continue to deteriorate absent the acquisition of new regulated businesses. NextEra has tried repeatedly — mostly in vain — to buy other large electricity utilities in recent years.
But water is also a regulated monopoly and, with systems that are, on average, a half-century old, an investment opportunity. Americans now spend more on their water rates than on natural gas bills.
Still, given NextEra’s trailing adjusted earnings of $5.3 billion, it would take a lot of Towamencins to make a difference: The town’s wastewater system generates only $2 million a year after expenses. That’s a literal drop in the bucket, especially when you consider the time and effort taken; NextEra has been involved in the township’s sale process for at least 18 months.
And then there’s the political blowback.
Water, whether as fresh supply or treating the waste, is a foundational element of any community. That’s one reason why the current crisis in Jackson, Mississippi, and the many before it attract national attention. Even where such problems don’t exist, people are touchy about tinkering with such a vital service. In Towamencin, opposition centers on cost.
—Bloomberg