Trickle of water sector IPOs seen increasing

By Euan Rocha

NEW YORK (Reuters) - With investor thirst for companies in the water purification sphere sparking a wave of acquisitions in recent years, more privately held companies in the sector are likely to go public in hopes of boosting their value.

Sparked by growing concerns over clean water shortages, the increased infrastructure needs of developing countries, more stringent regulations and an aging U.S. water distribution system, water companies have become prized targets.

Private equity firms and other large players like General Electric Co (GE.N), Dow Chemical Co (DOW.N) and 3M Co (MMM.N) have scooped up many water purification equipment makers with the most promising growth prospects within the fragmented water industry.

"With the intensity of interest in the (sector) there are certainly drivers for companies to go public," said Steve Maxwell managing director of Techknowledgey Strategic Group (TSG), which provides consulting and advisory services to the environmental industry.

In the near term, consolidation has narrowed investment opportunities, but in the long run the sector is likely to see more new entrants, said Philippe Rohner, a fund manager at Pictet, which manages about $4 billion in the water industry.

Globally, the industry generates about $450 billion in annual revenues, with most coming from water utilities, and only about one-tenth, or $45 billion, pumped out of the water purification and allied services.

The water utilities sector, largely regulated with a fixed rate structure, does not offer rapid growth prospects many investors seek.

Also, the infrastructure segment of the water sector, which involves producing pipes and valves, has low barriers to entry that have attracted low-cost firms and squeezed profit margins.

This leaves the more attractive, high-growth water purifications component makers, where opportunities have been quickly evaporating.

"The mid-sized range has definitely been thinned out with the consolidation activity," said TSG's Maxwell.

He noted there are few publicly traded water purification companies with revenues in the $50-million to $500-million range. Most of them are private, family-owned entities.

The spate of deals in the water sector has also pumped up valuations, leaving few attractive water pure plays, Goldman Sachs analyst Deane Dray said in a recent note to clients.

In 2006, GE bought Zenon for about $655 million, while Dow Chemical acquired the Zhejiang Omex Environmental Engineering Co for an undisclosed sum.

Other large players, like Pentair Inc (PNR.N), Blackstone Group LP (BX.N), 3M Co and Siemens AG (SIEGn.DE), have also grabbed attractive assets.

Dray noted that Pall Corp (PLL.N) and Calgon Carbon Corp (CCC.N) are among a handful of water purification companies still seen as likely targets.