Environmental Valuation & Cost-Benefit News

General Electric Co., the world's largest company by market value, agreed to acquire Ionics Inc. for $1.1 billion in cash to tap rising demand for water purification and treatment in developing countries. General Electric will pay $44 a share, a 48 percent premium to Ionics' stock price yesterday. Investors holding 20 percent of Ionics' stock outstanding have agreed to vote their shares in favor of the transaction, General Electric said in a statement. The purchase will add desalination and filtration to General Electric's industrial water-treatment division, the world's second- largest. It also will help accelerate the development of new water- purification technology, the company said. Chief Executive Jeffrey Immelt is counting on acquisitions in areas such as water to help push yearly profit up at least 10 percent starting next year.


``This acquisition can't be looked at by itself,'' said Mark Demos, an analyst in Cincinnati with Fifth Third Investment Advisors, which owns more than 14 million General Electric shares. ``When GE consolidates an industry they want a total solution and they needed Ionics to provide that.''
Shares of Fairfield, Connecticut-based General Electric fell 23 cents to $35.58 at 1:09 p.m. in New York Stock Exchange composite trading. They have climbed 25 percent in the past year. Ionics, whose shares had dropped 6.3 percent in the past year, surged $13.56, or 46 percent, to $43.31.


General Electric is expected to have at least 6 percent net income growth this year, the average estimate of analysts surveyed by Thomson Financial, as Immelt integrates acquisitions. He is trying to build a company with businesses that have faster growth rates and that are less sensitive to economic swings, while expanding in regions such as Asia.


Ionics, formed in 1948, is the fourth-largest U.S. water- treatment company by sales. The Watertown, Massachusetts-based company had a net loss of $44.8 million last year on revenue of $347.4 million. Ionics' return on common equity averaged 1.4 percent in the past five years, while its share price was 251.1 times earnings, according to Bloomberg data. General Electric's average return was 24.9 percent while its share price was 30 times earnings.


``The price is expensive, given the low return on equity that the company has had for several years,'' said Steve Hoedt, an analyst with National City Corp. in Cleveland, which had 23.5 million General Electric shares as of September. ``Sometimes GE does things that leave investors scratching their heads, but they should be able to clean up Ionics rather quickly.''


General Electric expects ``significant cost and revenue synergies,'' from the Ionics transaction, said William Woodburn, chief executive of GE Infrastructure, the unit that oversees the water business. Ionics has an order backlog of $4.5 billion, he said in an interview.


General Electric can expand Ionics' financing offerings for customers through its GE Commercial Finance unit as it targets areas such as China and Middle East. GE Water's sales force will also be able to pitch mobile water services, which provide clean water during construction, renovation and crisis, Woodburn said. ``We paid a premium, but it's well worth it,'' Woodburn said. ``I call it a smart acquisition because of the amount of synergies and growth capabilities with the financing market and the reach of our customer base with 2,200 salespeople that now have access to that mobile water fleet.''


Government requirements for cleaner drinking water and better wastewater treatment have spurred demand and led to industry consolidation. Siemens AG, Germany's largest engineering company, in August acquired most of U.S. Filter Corp. for $993 million to expand in equipment for water treatment and supply.


The World Health Organization estimates that, globally, 1.1 billion people lack access to clean water supplies, and that 2.4 billion lack access to basic sanitation. he basic human water requirement is 1,000 cubic meters per year. In 1995, 166 million people in 18 countries lived below that level. By 2050, potable water availability is projected to fall below that level for 1.7 billion people in 39 countries. Water shortages now plague almost every country in North Africa and the Middle East. Desalination of sea and brackish water is rapidly growing as the principal source of new fresh water in the world, according to the World Health Organization.


Immelt began building GE Water two years ago by purchasing BetzDearborn for $1.8 billion. That gave GE a water-treatment company with about $1 billion in revenue, and chemicals used to remove pollutants from water that flows out of refineries, manufacturing plants and power plants and helps prevent corrosion from water that flows into them.


``They seem to be positioning themselves for a world that is short on clean water and clean energy,'' said Brian James, an analyst at Loomis Sayles in Boston. Loomis Sayles had 5.79 million shares of General Electric as of the end of September.


Ionics has sold or installed more than 3,000 desalination plants. Nearly half of its sales came from outside the U.S.


``Ionics had to finance many of its third-world projects just to sell product, and there are financing disputes with countries like Trinidad, which have been going on for years,'' said Alan Fournier, general partner for Pennant Capital, which manages about $750 million in assets and has short interest in Ionics. ``GE must be desperately seeking growth to buy this company at this price.''


Water is part of the GE Infrastructure unit, whose businesses also include sensors, security, and factory automation software. The Ionics purchase is expected to close in the first half of 2005, General Electric said in the statement.


``My problem with this is GE's paying up for these assets,'' said Jim Zhao, analyst at Federated Global Investment Management, which owns 11.86 million General Electric shares. ``I also understand they're doing it because they have to increase their internal growth rate in the industrial side of the business.''


GE Infrastructure's revenue will rise at least 15 percent in 2005 from this year's $3.5 billion, Woodburn said. General Electric is forecast to have $150 billion in revenue this year and $161.2 billion in 2005, the average estimates of analysts surveyed by Thomson.


The company's industrial water-treatment business trails Nalco, a former Suez SA unit sold to a group of investors including Blackstone Group last year, Woodburn said. GE Water targets about a $40 billion segment of that industry including filtration, waste, maintenance and environmental services for companies, Woodburn said.


General Electric also will assume about $200 million in debt. It is too early to discuss potential job cuts, spokesman Jeff Demarrais said.

by Rachel Layne rlayne@bloomberg.net.

Bloomberg News Service www.bloomberg.com</a>