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California drought spotlights this $7.5 billion acquisition


Water technology supplier Xylem (XYL) announced Monday morning it will buy Evoqua water technology (WATER) in a $7.5 billion deal. The agreement hints at consolidation of the water industry, amid recent increased water supply stress caused by drought in California and water shortages in the Colorado River. XYL stock fell about 8% on Monday while AQUA stock spiked 14% following the announcement.




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Under the terms of the agreement, shareholders of Pittsburgh-based water treatment company Evoqua will receive 0.48 XYL shares for each AQUA share they own. That amounts to $52.89 a share with a 29% spread based on the Jan. 20 closing price.

Washington, D.C.-based Xylem expects the acquisition to bring in $140 million in total costs over three years. The deal will close in mid-2023, pending shareholder and regulatory approval. After the acquisition, Xylem shareholders will own 75% of the shares of the post-merger company, and Evoqua shareholders will own 25% of the company’s shares.

The acquisition comes as communities and water managers across the Western United States look for alternatives, as traditional groundwater and river water sources are under increasing pressure. By some estimates, despite recent rains, the western United States is experiencing its worst drought in a millennium. About 65% of the US is in some form of drought, according to data from US Drought Monitoring.

Parts of Colorado, Kansas, Oklahoma, Nebraska, Nevada, Utah and Oregon are experiencing “extraordinary drought,” which is the most severe drought conditions. Drought Monitor data shows that Texas, California, Montana, New Mexico, North Dakota and South Dakota are all experiencing severe to extreme drought.

California Drought/U.S. Water Crisis Escalates

Water stocks, many of which are utilities, are often overlooked by investors. However, supply-demand dynamics have increased over the past year, prompting increased attention to suppliers of water filtration and treatment, desalination and other related technologies.

Scientists think a super-drought that started in 2000 reduced runoff in the Colorado River system to a record low in the second half of 2022. That led to a 75% reduction in water availability in one area. some of the largest reservoirs in the West, including Lake Powell and Lake Meade. . That prompted the federal water regulator, the U.S. Bureau of Reclamation, in October to warn California, Arizona and Nevada that it could impose supply cuts to protect the Colorado River and its two main reservoirs. from being abused.

To avoid arbitrary penalties, the agency urges states to reduce water use to 2 million to 4 million acres, which is just one-third of the river’s average discharge. The result was a complex map of the front lines, between nations, communities, agriculture and industry.

That has led to extreme circumstances, such as in the Arizona suburb of Rio Verde Foothills. Residents have filed a lawsuit against the city of Scottsdale for cutting off the city’s water supply to 500 homes in the community. Meanwhile, Phoenix does not have an adequate groundwater supply to continue community building plans in the White Tank Mountains, after the Arizona Department of Water Resources reported that the area would be short of 4.4 million acres. -feet of water for the next 100 years.

In California’s San Joaquin Valley, Tulare, Kern, and Fresno counties, water is currently being delivered to smaller towns that have run out of supplies, CNN reported. According to state data, more than 1,400 wells in California have been exhausted by 2022, a 40% increase from the previous year.

Water stocks, AQUA, XYL, VEOEY, ERII

AQUA stock jumped 14% on Monday, breaking past 45.50 and hitting its highest level since April. The stock remains in a buy range to 47.78. Meanwhile, XYL stock is down about 8% from its mid-November low. XYL stock is up 15% over the past three months and up 2.4% over the past year.

Veolia’s environment (VEOEY) is possibly the largest desalination operator in the world, with almost 2,000 projects. That includes the Kurnell Desalination Plant in Sydney, Australia, which is capable of providing 15% of the city’s drinking water. Veolia shares were up 0.4% on Monday.

synthetic electricity (GE), also a busy player in the desalination game, was up 2.4% ahead of Tuesday’s earnings report. Energy Recovery (ERII) is a pure desalination game. Shares rose 0.5%.

Another desalination game is Brookfield Infrastructure Partners‘ (BIP) Subsidiary Poseidon Water. Brookfield shares were up 0.9% on Monday.

Among other related stocks on Monday, America’s Project (AWK) increased by 0.3%, while United States of America (AWR), California Water Service Corporation (CWT) traded nearly 2% higher.

You can follow Harrison Miller for more news and stock updates on Twitter @IBD_Harrison.

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