How 'populism' in Europe pushed France's Suez to pay $3.4 billion for Philly's GE Water (Update)

Suez, the France-based water company named for the globe-shrinking ship canal it built 150 years ago, agreed last week to pay $3.4 billion for Trevose-based GE Water, the $2.1 billion (yearly sales) water-cleaning chemicals and industrial-systems business based at the former Betz Labs, because "populist sentiment" in Europe has made it tougher for Suez to expand its main business there, writes analyst F. Reese Tisdale in a report to clients of Boston-based Bluefield Research LLC.

As with suburban Philadelphia-based American Water Works and Aqua America, local water and sewer works have been Suez's main business. But the company has run out of systems to purchase in its native Europe, where cities are now more interested in buying back and running their public utilities, instead of selling them to profit-making foreign firms.

So adding GE Water and its blue-chip industrial clients will help Suez "to quickly redirect its focus" by boosting its total U.S industrial sales, from under $600 million a year to $2.7 billion, Tisdale tells us.

UPDATE: It's ironic, notes Ryan M. Connors, utilities analyst at Boenning & Scattergood in suburban Philadelphia: "While the U.S. prides itself as more of a free-market, private sector-driven economy, Europe has always had a greater private sector participation than the U.S." in owning city utilities.  

But now Europe is reversing and has become skeptical of private-sector ownership. There, "Populism (is) driving greater pushback against privatization," he noted. In the U.S., it's financial pressures (such as pension funding), maintenance problems (with Flint, Michigan's lead poisoning an ungly example), and 'fair value legislation' (making it easier for utilities to charge ratepayers to pay for acquisitions)  leading to an acceleration in privatization." (END UPDATE)

GE Water employs around 7,500 worldwide, including more than 300 at its Trevose headquarters. The business, headed by German-educated Heiner Markhoff, claimed yearly profits of around $250 million, or close to 13% of sales, before income tax and financial costs.

GE put the Water and Process Technologies group up for sale last year after arranging to spin off its larger oil and gas business into a combination with Baker Hughes Corp. (revised). GE said oil and water were complementary businesses, with energy companies among the water group's largest and fastest-growing client groups.

The Trevose campus has shrunk since Betz's days as an independent company and, later, an arm of Wilmington's former Hercules Inc.

Including its water and sewer systems, the GE deal gives Suez total sales of around $11 billion, close to water-industry leader Veolia. It also puts Suez with Danaher and Kemira among the larger industrial water-purification chemicals and systems makers.

But the buyer can't expect to force GE customers to start purchasing other Suez services, in hopes of quickly boosting sales and profits, Tisdale warns.

"Suez must tread lightly" in merging GE Water with its own smaller industrial group, or it will lose customers, in a fast-consolidating global water business where operators like Danaher, Honeywell, Emerson and Lanxness compete for water industries with well-funded buyout firms like Clayton, Dubilier & Rice, KKR and Lone Start Funds.

Clayton Dubilier was Suez's final rival of the 70 firms that expressed interest in GE Water, Tisdale notes. Finanical buyers drive up industrial prices, forcing buyers to look more carefully at profit margins and cost cuts.

What will the new French owner do with the Trevose offices and labs, a survivor outpost of General Electric Co.'s once-vast Philadelphia workshops, which made power-station generators, guided-missile and orbital-satellite components and many other products, before the companies sold or shut most of the works and moved much of its industrial production to cheaper labor markets?

Suez hasn't detailed its operating plans; we'll know more after the deal closes. That's supposed to happen by midyear.