The exponential growth China has posted over the past decade is taking its toll. Rapid urbanization and industrialization, coupled with inadequate investment in basic water supply and treatment infrastructure, means the country is suffering a water crisis.
As the authorities struggle to confront the impending environmental catastrophe, the adoption of a more market-based approach to water and wastewater treatment is attracting increasing interest from overseas investors. As China slowly loosens the leads on its economy, foreign companies such as Siemens and GE are attempting to break into the market to take advantage of consolidation in this sector.
Since China's accession into the World Trade Organization, the country's water sector has undergone significant transformation, and the push to improve the quality of its water infrastructure is attracting significant foreign capital.
Riding the M&A wave
The sector is highly fragmented and a prime candidate for consolidation. France-based Suez and Veolia Water, the environmental and energy business, are just two companies eyeing the market. Private equity players are also buying assets, alongside Veolia, Suez, RWE and British water companies, which are exiting water businesses in the United States in favour of China.
Veolia Water Asia and Beijing Capital Group, a state-owned investment firm, acquired a 45% stake in Shenzhen Water, a Chinese water utility, for approximately US$400 million back in 2004. In addition to other joint ventures, build-operate-transfer (BOT) models are another common form of investment for foreign players. "Investors should be interested in constant returns, not quick returns, as one BOT project will generate returns over 23 years," said Lester Tay, CEO of Asia Water.
Outside China, analysts believe that Veolia is looking to acquire elsewhere in Asia. Some analysts speculate that Veolia would prefer to make relatively small purchases across the region's wastewater sector, around the US$120 million to US$250 million mark, with up to US$400 million in total to spend on acquisitions. The company spent well over US$600 million in BOT projects in China in 2003 alone.
No time to waste
Both Singapore's Darco Water and Asia Environment are interested in receiving bids from Veolia. Darco Water CEO Thye Kim Meng says the group is open to selling up to 30% of its shares to Veolia. "We would be more than happy to have them as our major shareholder...if they held 30% of our holdings, we could have access to their technical capabilities," Thye says.
The CFO of Asia Environment, Koh Poh Yoek, has also said that it considers itself an attractive takeover target for Veolia. "We would be open to a majority or minimum stake sale to Veolia, but anything below a 50% share might not be attractive to shareholders," Koh says. Asia Environment is also seeking either JV partners or potential acquisitions in the northern regions of China, such as Hei Long Zhao and Dalian.
CNA Group, the Singapore-listed control and automation systems specialist, is also targeting Northern China to complete its acquisition strategy, says CEO Michael Ong. CNA recently acquired a 51% stake in a leading China-based water and waste treatment solutions provider, Beijing Herocan Environmental.