ITT Industries
In The News
Calgon Carbon, Water Companies, Lure Fidelity, Wells

June 17, 2005
By Rachel Layne and Carol Wolf
Bloomberg

Calgon Carbon Corp., a water-purification company too small for any benchmark stock index, is attracting big investors such as Fidelity Investments and Wells Fargo & Co.

"It's a huge market, but fragmented and therefore a big opportunity," said Peter Klein, who helps manage $21 billion in Cleveland for Fifth Third Asset Management, which holds shares of water products companies including Pall Corp.

Demand for treated water is rising among industrial customers such as computer-chip makers, which use 3,000 gallons to produce a single eight-inch semiconductor wafer. U.S. cities and developing nations including China, where officials say almost two-thirds of its cities don't have enough water, are also upgrading municipal systems.

Fidelity, the world's largest mutual fund company with $1.1 trillion in assets, last quarter added 900,000 shares of North Andover, Massachusetts-based Watts Water Technologies Inc., a maker of water purification products.

Wells Fargo's Wells Capital unit, which manages $436 billion, bought 8 percent of Pittsburgh-based Calgon, a maker of ultraviolet disinfecting products that has a market value of about $337 million.

Hedge fund Duquesne Capital Management, with $3.26 billion in assets, will earn 31 percent, or $3.81 million, on its 239,000 shares of Cuno when 3M Co. completes its $1.29 billion purchase of the water-filter maker in the third quarter.

Buying Targets

Water stocks are also getting a boost from an industry consolidation led by General Electric Co., ITT Industries Inc. and 3M. They've paid premiums of at least 30 percent in the past year while snapping up companies such as Ionics in the $400 billion market for products and services.

"If a company wants in water, they have to pay the acquisition premiums," said Michael Gaugler, an analyst with Boenning & Scattergood Inc. of West Conshohocken, Pennsylvania. "Investors know that and are buying into the targets."

General Electric closed its $1.3 billion purchase of water-treatment company Ionics in March, paying a 48 percent premium. That's more than the 32 percent average premium on manufacturing deals since 1997, according to Bloomberg data.

"If you can't afford to pay enough, there's going to be a natural evolution of who's going to win," said William Woodburn, who runs GE's Infrastructure business, which includes water, in a March 2 interview.

The Dow Jones Water Index has more than doubled in the past five years, compared with a 17 percent slide in the Standard & Poor's 500 Index. Shares of Fairfield, Connecticut-based GE rose 32 cents to $36.43 at 10 a.m. in New York Stock Exchange composite trading. 3M climbed $1.35 to $78.02, while ITT gained 70 cents to $95.86.

'Huge' Opportunity

Zenon Environmental Inc. is among the takeover targets that have emerged since the Cuno transaction, said Lawrence Casse, an analyst at Toronto-based M Partners. The maker of membranes to filter bacteria from municipal drinking supplies had sales of $233.8 million last year.

Shares of Ontario-based Zenon have risen 10 percent since May 11, the day before the Cuno purchase was announced. Pentair Inc., based in Golden Valley, Minnesota, has climbed 7.5 percent in that time, while irrigation-equipment maker Lindsay Manufacturing Inc. has jumped 22 percent. That compares with a 3.4 percent rise in the S&P 500 Index.

3M, the St. Paul, Minnesota-based maker of 55,000 products ranging from Post-it Notes to software, paid a 31 percent premium for Cuno, the biggest acquisition in its 103-year history. Cuno had $352 million in sales last year.

"The size of the opportunity here is huge," 3M Chief Executive Officer James McNerney said on conference call last month announcing the Cuno purchase.

China

Some analysts said the big gains may be over. The consolidation of larger targets may have ended, leaving a "tiny group" for investors, said Tom Burnett, president of Merger Insight, an affiliate of brokerage Wall Street Access.

Smaller companies "need to position themselves as niche operators," said Matthew Barker, a San Antonio-based analyst at consultant Frost & Sullivan Inc.

The demand for water-products is being stoked by developing and developed markets, said analysts including Neil Berlant, managing director of the water group at Los Angeles-based investment-banking firm Seidler Cos.

In the U.S., more than $800 billion needs to be invested in the next 20 years to upgrade aging water infrastructure, according to a 2002 report by the Congressional Budget Office.

China needs to invest 2 trillion yuan ($241 billion) by 2010 to improve the distribution and quality of water in its cities, Qiu Baoxing, vice minister for construction, told reporters in Beijing on June 7.

Ultra-Pure

"The visibility for growth of all things water is exceptional," Berlant said. "In manufacturing, just water isn't satisfactory. It has to be purified, or ultra-purified water, and it's not discretionary."

General Electric and ITT are also competing in the water chemical treatment business with Nalco Holding Co., a Naperville, Illinois-based company that sold shares to the public in November. Nalco is targeting a $16.5 billion slice of the market that's growing at about 4 percent annually, Chief Operating Officer William Roe said in a June 7 interview.

The Ionics purchase allows GE to pitch water projects and services globally, while being able to offer low-rate financing because of its top AAA credit ratings.

"Big China deals, big Middle East deals," GE Chief Executive Jeffrey Immelt said at an investor meeting in Washington on May 9. "That's what we smell, that's what we see and that's why we're going into the business."