Water and mergers and acquisitions
This is a follow-up on my entry water post from yesterday. The thesis here is that mergers will be a big part of the landscape as companies seek economies of scale and scope or vertically integrate to deliver water to their customers. But before I go into the corporate landscape, let me continue developing some thoughts on why water matters now.
We all know that water is the key to sustaining life. But what a lot of people don’t know is that water is actually in short supply. Here’s the math on why.
First, the big stat most people here is that the world’s surface is covered 71% by water. And while water exists in rivers, lakes, underwater aquifers and in the air and so on, 96.5% of the water on the earth’s surface comes from oceans, which is salt water not appropriate for human consumption. In fact, of the 332.5 million cubic miles of water only 2.551 million is fresh water. That’s 0.7%. This may seem like a lot, but it is unevenly distributed and costly to transport because of weight. And it has to be used to feed billions of people every day.
So, that’s the macro picture.
Now, the UN says that 9 countries possess 60% of the world’s available fresh water. You can probably think which ones they are based on size: there’s Brazil, Russia, China, Canada, Indonesia, the US, and India. But the other two are Columbia and the Democratic Republic of Congo.
And so if you look at a world map of annual renewable water per person per year, there’s a massive differential across the map with the best in blue and the worst in red. The areas in the deepest red are where we should expect migration flows to come from and where we should expect ethnic and military conflict to arise as well. Some of this is already happening.
Now, water usage has grown twice as fast as the world’s population this past century, according to the United Nations. And this differential is not expected to stop, in part because of the water intensity of food production. The US, for example, has 5% of the world’s population and 25% of GDP but uses 30% of the world’s water. And given present trends that percentage would reach an unlikely and unsustainable 70% by 2025. So, for the US, cracking the water usage nut is vitally important.
What’s more, as we saw in Flint, Michigan, there is a vital need to upgrade the water infrastructure in the United States as well. The American Society of Civil Engineers says that there will be a $84.4 billion water infrastructure tab to pay by 2020.
I think all of this makes water not just a big issue globally, but something that will draw attention in the US and drive investment returns.
One area to look is water infrastructure companies, particularly the water utilities because they could benefit from economies of geography and scale. American Water Works is an S&P500 company spun off by German utility RWE in 2008. It has a market cap of under $14 billion and is the largest public water company available in the US. And it’s got there through acquisition. Aqua America is the 2nd largest, with a market cap of under $6 billion. So between them, the two largest water investments have less than $20 billion in market cap. That’s not very large when you consider that Dominion Resources and Exelon, two large utilities close to me, have a combined market cap over $80 billion. And again, that’s the result of mergers and acquisition.
I think we are going to see huge growth in water-related investment opportunities and there is going to be a big wave of mergers as competitors try and get scale. This is my second cut at looking into this space. More coming soon