Clayton, Dubilier & Rice and BASF are reportedly considering a sale of water treatment company Solenis, prompting a re-examination of a market buoyed by fresh deal precedents and growing end markets. A deal could throw a gauntlet down for dealmakers eager for exposure to a high recurring revenue sector that stands to gain alongside its industrial-facing clients in a post-Covid recovery.

Veolia finally cleared months of acrimonious negotiations with rival waste and water treatment company Suez to clinch a $15.4 billion deal in April. The negotiations were more complex than most given Veolia’s 29.9 percent prior stake, but provide a benchmark for sizable deals going forward. With the line drawn in the sand and Solenis’ auction in the offing, will private equity play a role in the sector’s consolidation?

Sector tailwinds remain robust. Should President Biden’s American Jobs Plan become law, the sector will have access to $56 billion of federal spending to upgrade rural and aging water systems, and increase purification capacity to filter out toxic PFAs. That spells lucrative capital contracts for providers, who net higher service and aftermarket revenues on such projects. High renewal rates for corporate customers, sometimes approaching 90%, could mean some government-stoked revenues become recurring even after funding expires. 

The opportunity ticks a lot of private equity’s boxes. The market is both fragmented and massive. Evoqua Water Technologies (NYSE: AQUA), a leading player in PFA remediation, estimates its addressable market across all forms of water treatment is $85 billion compared to an aggregate $600 billion market.

Exit opportunities would also appear to be deep. Evoqua went public after rejecting a $2.5 billion takeover offer from larger rival Xylem (NYSE: XYL). Industry player Kurita has also been acquisitive. And equity markets continue to reward high growth offerings.

Water treatment companies face a variety of end markets, with customers ranging from municipal drinking water utilities to microelectronics companies. Evoqua Water Technologies expects near term demand growth in healthcare, municipal wastewater, power, food and beverage, while post-Covid reopenings should boost aquatics and refining end markets. Solenis also serves chemical end markets.

We’ll watch the sale for signs of more water treatment activity to come.