JPMorgan plunges into US water sector

The firm agreed to buy SouthWest Water Company, a NASDAQ-listed water and wastewater utility, for $11 per share in cash, for a total equity value of $275m. Water investor Water Asset Management is a 10% equity partner in the deal.

JPMorgan Asset Management’s Infrastructure Investments Group has agreed to buy a California-based water utility in a $427 million deal, marking the firm’s first investment in the US water and wastewater sector.

The utility, NASDAQ-listed SouthWest Water Company, agreed to be taken private by JPMorgan and its partner, Water Asset Management, for $11 per share in cash, or $275 million total. JPMorgan and Water Asset Management are 90 percent and 10 percent equity participants in the transaction, respectively.

Their offer price represents a premium of 56 percent to the company’s 2 March closing price of $7.07 and a 71 percent premium to its 30-day average closing price, SouthWest Water chief executive officer Mark Swatek said on a conference call this morning.

JPMorgan and Water Asset Management will also assume the company’s outstanding debt, bringing the total value of the transaction to $427 million.

Swatek said the acquisition is not subject to any financing requirements, meaning that JPMorgan and Water Asset Management can choose to raise the cash for the acquisition through whatever mix of debt and equity that they choose. The transaction is, however, subject to shareholder and regulatory approval, which Swatek said could take up to 12 months.

In the meanwhile, JPMorgan and Water Asset Management have agreed to make a near-term investment of $16 million in the company via a private placement of shares priced at $6 per share.

“It’s an immediate infusion of capital on the part of our new partners and it’s being done to facilitate capex investments,” Swatek said during the conference call. The Los Angeles-based company provides water and wastewater services to customers in nine states, with the bulk of its customers in California, Texas and Alabama.

Swatek added that SouthWest Water agreed to JPMorgan’s and Water Asset Management’s take-private offer after the company’s board began to examine “strategic alternatives” with the help of its financial advisor, Wells Fargo Securities. Wells Fargo reached out to potential partners, including JPMorgan and Water Asset Management, who then made their offer.

Swatek declined to say whether the offer was the result of an auction. However, he said that “this opportunity has been thoroughly vetted and the board made a unanimous decision to accept this offer”.

The acquisition marks the first deal JPMorgan Asset Management’s Infrastructure Investment Group has agreed in 2010. It is the firm’s second investment in water infrastructure but the first in the United States. In 2007, the firm acquired a 32 percent stake in Southern Water,  the seventh largest water and sewer company in the UK, in a deal valued at £4.2 billion, according to an old press release.

Macquarie Capital advised JPMorgan and Water Asset Management on the transaction.