Water technology company Xylem Inc said on Monday it had agreed to buy Evoqua Water Technologies Corp for $6.42 billion in shares, aiming to tap into growing global awareness of risks around water scarcity.
Evoqua shareholders will receive 0.480 new Xylem shares for each Evoqua share they own, representing a premium of about 29% based on the last market close.
Shares in Xylem, which provides water and waste water treatment services, fell more than 10% in early trade as investors worried about the punchy price tag.
Explaining the outlay, Xylem executives told analysts on a conference call they expected the deal to generate cost synergies of about $140 million within three years.
“Clearly there is upside, both in cost but mainly revenue,” Xylem Chief Executive Patrick Decker told Reuters, adding the companies had not yet committed to revenue targets.
Demand for fresh water is rising globally due to population growth, industrial expansion and increased agricultural development. Policymakers and business leaders are backing global initiatives to help secure supply.
“When you think about what’s going on around water infrastructure, the issues of scarcity, resilience, affordability … it’s the right time for us to be together,” Decker said.
Tying up also “puts us in a better position to do things beyond this,” including potential further acquisitions, he said.
Pittsburgh, Pennsylvania-based Evoqua serves industrial, municipal and recreational customers in nine countries.
Its wastewater management business has enjoyed broad demand from most of its operations in recent months, but the purchase price – which reaches $7.5 billion including debt – spooked investors, according to CFRA analyst Jonathan Sakraida.
“The market’s negative reaction on (Xylem’s) shares reflects (Evoqua’s) $7.5 billion price tag, in our view,” Sakraida said.
Lazard and Guggenheim Securities acted as financial advisers to Xylem, while Gibson, Dunn & Crutcher LLP was its legal adviser. (Reporting by Nathan Gomes in Bengaluru and Isla Binnie in New York Editing by Vinay Dwivedi and Mark Potter)