Water Is Creating Stir as Business Investment

Jean-Marie Messier, Vivendi Universal’s chief executive, reversed himself last week and told shareholders that the company would retain its 63% ownership of Vivendi Environnement, one of the largest water service companies in the world.

That could be a smart move. Water is shaping up as a very attractive business as worldwide needs for water and for treatment and purification are bringing forth a new global industry.

French political objections reportedly dissuaded Messier, who had intended to reduce his company’s stake in Vivendi’s water subsidiary. But he also might have noticed that big investors and major companies are rushing to invest in water.

Recognition is dawning among international experts, businesspeople and investors that water availability is becoming a major question in many areas. In the Middle East, water is an underlying factor in tensions among Syria, Jordan, Israel and the Palestinians.

In the U.S., Virginia, Maryland, Georgia and Florida are among neighboring states quarreling over water rights. Disputes between Mexico and California over Colorado River water could block a water-supply deal for San Diego. Congress is proposing legislation on resource planning and quality standards for water. The drought-ridden Northeastern states are examining water management programs that California pioneered in the last decade.

The Environmental Protection Agency and municipal utility groups agree that more than $500billion of investment in U.S. water and sewer infrastructure will be needed in the next 20 years.

The rising concerns add up to a global business with $300 billion in annual revenue that is growing 10% a year. It’s an industry dominated thus far by two French companies and a German company. The French firms are Vivendi Environnement--which owns U.S. Filter of Palm Desert--and Suez, the old canal company that merged decades ago with Lyonnaise des Eaux. Germany’s RWE, an energy and water conglomerate, is buying American Water Works Co., a large Voorhees, N.J.-based water utility.

General Electric Co., which bought a water treatment company in February, looks upon the water business as a “global growth platform,” says Debra Coy, water industry analyst at Schwab Capital Markets in Washington.

But water is too critical, too governed by politics, ancient rights and passions to be an easy business.

For example, investors in the Delta Wetlands Project, who have a plan to store water on islands in the Sacramento-San Joaquin Delta, have been working for 15 years to get permits and the process still is complete, says Fiona Hutton, a water expert and consultant to Delta Wetlands.

The delay flies in the face of California’s need for additional water storage as insurance against drought years, because the state loses rights to 16% of its current annual take from the Colorado River to neighboring Nevada, Arizona and Mexico.

The main driver of business at present is the need for cities to repair and modernize their water systems, after years of postponed maintenance, to comply with water quality regulations. U.S. Filter, the U.S. operation of Vivendi Environnement, has just won a 20-year contract worth $1billion to manage the water supply of Indianapolis.

Indianapolis finds it economical to outsource water management because U.S. Filter can upgrade and operate water treatment facilities efficiently and keep up with changing environmental regulations.

“It’s a business that requires long-term contracts so that private companies can recover costs of investments,” explains Andrew Seidel, president of U.S. Filter.

If very large expenditures are necessary to completely replace an aged water system, the city would raise the necessary funds at low interest by selling tax-exempt municipal bonds.

U.S. Filter is negotiating with Stockton for a waste-water management and recycling contract. Suez has just received contract extensions for work on the water systems of Burbank and Hoboken, N.J. And RWE is in the process of paying $7.2 billion for American Water Works, which owns water supply companies in 22 states.

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Early Start Gives European Firms an Edge

European companies dominate the global water industry because they started earlier with a different pattern from the U.S. system, which made water supply a task for municipal governments.

In 1853, Generale des Eaux, an irrigation company that now is Vivendi Environnement, obtained a contract to manage water for the city of Paris. Later, the company managed water for Venice, Italy; Istanbul, Turkey; and Oporto, Portugal.

In 1999, Vivendi paid $6billion to acquire U.S. Filter, a firm that Coachella Valley entrepreneur Richard Heckmann had built by consolidating pump and filtration firms and water-service companies.

The industry remains fragmented, but the next few years will see more mergers of equipment firms and service companies, such as Pall Corp. of East Hills, N.Y., and San Jose-based California Water Service Group, says analyst Coy of Schwab Capital.

Water availability is becoming a pressing issue. California requires proof of water availability before a housing project can break ground. And electronics plants must assure themselves of supplies of very pure water and waste-water treatment facilities to handle their effluent.

Also, California and the Western states are used to cycles of drought every seven years or so. Now the Northeast, in its second year of scant rainfall, is thinking about drought cycles too. Such cycles create a demand for water storage.

It was a drought period a decade ago that got California thinking about more storage and developing markets for water transfer. The result is that the Metropolitan Water District, which serves most of Southern California, increased storage at sites such as Diamond Valley Lake Reservoir in Riverside County. It also began work on a pricing system for transferring surplus water from farms to urban and industrial areas.

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Water Storage Seen as Business Opportunity

To Los Angeles businessman Danny Villanueva, the situation is ideal for investment in storage facilities, which can collect water in wet years to be released in dry years. Villanueva, head of Bastion Capital, a venture capital firm that has had success in backing Spanish-language radio and television, is examining sites for storage facilities in many areas of Southern California.

Villanueva aims to invest $10million to $30million of his family’s money in water storage in the next few years.

“This is a long-term business, not like electricity where you can throw up a power plant, but a permanent business and a vital need,” Villanueva says.

Water also can be a very slow and frustrating business, because the substance is critical and regulation is pervasive. Santa Monica-based Cadiz Inc. and the MWD have been trying for many years to reach agreement and get approvals for a water storage facility in the Mojave Desert.

Michael George, president of Point Richmond, Calif.-based Western Water Co., has been trying for four years to get a permit to transfer agricultural water, which his company controls, to the city of San Diego. But different state water resources authorities have yet to agree on terms and permits for the deal, George says.

He says the permitting process is moving somewhat faster in Colorado, where Western Water bought ranchland with water rights and is applying to transfer water to the city of Denver. .

The bottom line is that increasing value and long-term business growth are perhaps more certain in water than in the entertainment industry that Vivendi Universal’s Messier seems to prefer.

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James Flanigan can be reached at jim.flanigan@latimes.com.