Private Investment Funds Set Their Sights on U.S. Water Systems
JP Morgan Asset Management and Water Asset Management inked a $275 million deal on Wednesday to take over SouthWest Water Company, one of the ten largest water companies in the United States. It strategically positions JP Morgan for additional takeovers of water systems, possibly even municipal ones.
Investment firms have long viewed water utilities as a way to earn steady profits, but few have purchased an entire water company. This is changing. As communities around the world face daunting water shortages, large banks and investors increasingly view public water supplies as profit centers.
The JP Morgan-led takeover of SouthWest Water, in particular, suggests that private interests are looking for ways to capitalize on water scarcity. As its name suggests, SouthWest Water works primarily in the southwestern regions of the country. It serves more than a million people in nine states: Alabama, California, Colorado, Georgia, Mississippi, Oklahoma, South Dakota, Texas, and Wyoming.
The prospect of owning water systems and their associated water rights during future water shortages may have lured and convinced the investment funds to pay 55 percent more than SouthWest Water’s market value. Debra Coy, a well-known water industry analyst, believes the high purchase price was based on a “long-term view” of the company’s value.
For SouthWest Water, it was also a way out of a messy financial situation. For the several years, the company has struggled with serious problems, including the takeover of its New Mexico utility by local governments and a class action lawsuit by investors. After it found errors in its books and had to delay and reissue financial statements, it almost lost its NASDAQ accreditation. (It got so bad that at an investment conference I attended last fall, the president of the company was questioned about his business background.)
Given these problems, it makes sense that SouthWest Water’s leaders would find it appealing to become privately held, to avoid having to file those pesky SEC statements. So, it also seems reasonable to believe that JP Morgan had the negotiating advantage and got the better end of the deal. In fact, this may be what prompted one firm to immediately begin investigating the transaction to see if Southwest Water’s shareholders are being ripped off. It’ll be interesting to see how that plays out.
Consumers should be wary that these big investment funds could try to squeeze out even more profits by hiking water bills and cutting services. They should also watch out for attempts by JP Morgan to use this new venture as leverage to takeover municipal water systems.
-Mary Grant