Will Gradiant Succeed with H+E where SUEZ, Stulz, and RENA failed?

Gradiant just announced its acquisition of H+E (formerly Hager und Elsässer) – 51% first, but it should go up to 100% in the coming year. But why would it possibly work this time, when H+E failed to build success with Degremont, Ondeo, Stulz, RENA and Aquarion? Let’s find out.

Mergers can be a bit like marriages. You’ve got to be compatible, and you’ve got to want the same things. A shiny ring (or a whopping 51% share) might look good now, but it won’t iron out underlying issues.

Given H+E’s historical struggle with merging cultures and failing to cash in on innovations, this Gradiant merger could be in for choppy waters. And hey, who knows, maybe Gradiant’s MIT brainpower will defy all odds. (but they’d better have a killer prenup.)

When H+E (Hager und Elsässer) was bankrupt

On the 1st of May 2014, Tobias Hoefer was appointed to rule a difficult adoption case – well, a company adoption case, but bear with me for the metaphor.

The family that was up for adoption had two older and quite well-known siblings, Stulz-Planaqua – an established municipal water treatment company, and Hager und Elsässer – a prominent industrial water specialist.

Sitting next to them, a bunch of smaller brothers and cousins would swiftly find new homes: Microdyn-Nadir, Senergie, or Ecolutia. But because of their size, it was quite a different story for the two big ones.

Unlike H+E, its sibling, Stulz-Planaqua was very courted

Stulz-Planaqua had a lot of suitors, though. At the time, Bilfinger, Evoqua, Hyflux, and Remondis expressed their interest. But what must have hurt the most the less courted Hager und Elsässer, is to see that Degrémont also wanted to get hold of Stulz-Planaqua, and not them. And the reason why that must have hurt is that Degrémont shortly ruled over Hager und Elsässer from 1998 to 2001. So it was like seeing your former daddy coming to adopt your sibling and not even looking at you. Not nice.

In the end, Stulz-Planaqua left the building with SKion Water, quite a new player at the time, but a home where it could grow, for sure, and get a wealth of new family members over the years. If you’re interested in that part of the story, you should probably listen to my podcast episode with Reinhard Hübner!

Still, sitting on that bench, Hager und Elsässer must have had some time to think and recall how it ended here.

The History of Hager und Elsässer (H+E)

The 1. April 1932, a 27-year old Willy Hager started a Machine Building Company specializing in central heating and water treatment. In 1937, he was joined by Heinrich Elsässer, and the Hager und Elsässer company was officially launched. The name would stay, even though Elsässer left in 1943.

After the Second World War, the company pivoted towards industrial water applications, in food and beverage first, then later also in energy and steel industries and it would kinda prosper over the next three decades.

In 1972, Willy Hager created a foundation named after him that still to this day delivers every year a price and a medal that financially supports innovators that have a positive impact on environmental topics.

First M&A move: Hager und Elsässer gets sold to EVT

To finance the foundation, the Hager und Elsässer company was sold to EVT at Willy Hager’s death in 1975 and then further integrated into GEC Alsthom in 1990, when they acquired EVT.

In 1998, GEC Alsthom went public on the Paris Stock Exchange, got renamed Alstom, and decided to divest from its industrial water business: Hager und Elsässer was up for sales.

At the time, french water giants had broad ambitions, and while the future Veolia had American dreams and was about to rule over Universal Studios, the future SUEZ wanted to get a foothold in Germany and seized the opportunity by acquiring Hager und Elsässer through its subsidiary Degrémont, that itself was integrating it within its own German subsidiary, Philipp Müller.

H+E gets sold to Alstom, then to Degrémont and Ondeo

Three years later, Degrémont hadn’t done much with its German arm and handed it over to another branch of the SUEZ group, Ondeo Industrial Solutions.

If you’ve followed the various M&A stories I’ve covered on this channel, you’ve already heard me saying that culture is a major reason for failure. And as much as the French and US cultures didn’t blend well in the Veolia / US Filter or SUEZ / Nalco stories, I can tell you firsthand that the French-German connection didn’t really work out well in the Degrémont then Ondeo – Hager und Elsässer story.

Culture Clashes for H+E (Hager und Elsässer) with its French Owners

I’ve personally started my water career at Degrémont, in a German-speaking environment in Switzerland. And when the failed love story between Degrémont and Hager und Elsässer was coming up in lunch talks or at the coffee machine, the one that was blamed was rarely the German.

So even if it wasn’t a nasty divorce at all, that probably explains why Degrémont wasn’t interested in getting Hager und Elsässer back 13 years later, when it was sitting on that bench next to Stulz-Planaqua.

2006: Stulz acquires H+E (Hager und Elsässer)

But back to our story: in 2006, Ondeo that hadn’t really integrated Hager und Elsässer either, sold it back to a German family business, Stulz. One year later, the two added Planaqua to the pot, and a bit like Siemens who, at about the same time, thought it could conquer the Water World with US Filter, the Stulz – Hager und Elsässer group went on a quite aggressive international expansion, mostly in Europe, but also in Asia and South-America.

The problem is that some of the contracts they signed, especially in Russia and Turkey, ended up being blackholes for cash, and in 2012, cash started running so short that the Stulz family had to resolve to sell most of the business to RENA, that acquired 94% of the group.

Cash gets short, and Stulz-H+E gets acquired by RENA

RENA, which specializes in equipment and solutions for wet chemical surface treatment processes, saw a great opportunity to extend vertically its semi-conductor and photovoltaic cell businesses with Hager und Elsässer, and also saw promising even if quite different markets in the municipal Stulz-Planaqua part, especially in fields like Waste to Energy.

But as the cash-bleeding group wasn’t already in the best possible shape, it doubled down with a steep change in market for RENA. Whereas Europe had been a powerhouse for solar cells until the early 2010s, it was rapidly being made uncompetitive by aggressive manufacturing growth in China, so that even RENA’s core business started needing cash.

RENA files for Bankruptcy

So, in 2013, the company tried to refinance itself by emitting two series of bonds, guaranteed with the Stulz-Hager und Elsässer part of the group.

Long story short, that wasn’t enough, and in February of 2014, RENA placed the Stulz-Hager und Elsässer in insolvency to try to preserve its core business… which didn’t work either, as one month later, RENA as a whole was now in insolvency.

So that’s where we are, this 1st of May 2014, as Tobias Hoefer gets to sort out the insolvency case and tries to find new homes for the children.

Hager und Elsässer’s mother and grand-mother companies are both insolvent, and his sibling Stulz-Planaqua just left the building with SKion Water.

Aquarion acquires H+E (Hager und Elsässer)

Two candidates are interested in the company, though: Outotec from Finland, which would use it as one more tool in its vast industrial toolbox, and Aquarion, an embryonic German industrial water group, that very much resembles SKion at this stage and led by Karl Michael Millauer.

The start of Aquarion was from zero, more or less. And Häger und Elsasser was in trouble, but not Häger und Elsasser itself: it was the Stulz Rena group. They were in a liquidity crunch. And H+E or Häger und Elsässer was interestingly enough, not loss-making. They were in the industrial area, money-making, but they had given all their loans upstream, all their guarantees. So when the parent and the grandparent, collapsed, H+E was thrown into insolvency as well.

That was certainly luck for us! Because we were one of the last interested buyers and therefore finally we got it. And I must say H+E Germany was a good acquisition. The company is doing very well, or quite well, not loss-making. And from this point, it was the key part of the Aquarion group.

Karl Michael Millauer – former CEO of Aquarion

Taking H+E out of insolvency

Thomas Will, Aquarion’s COO was a former Managing Director of Hager und Elsässer, now shortened H+E, and Karl Michael sure saw that as a key asset to bring the company back on track:

Every insolvency is a tough situation, as you know, with suppliers, with clients. To regain confidence with clients, to regain confidence with suppliers and with banks.”

Karl Michael Millauer

The respective trajectories of our two siblings widely differ, though, from 2014 to today.

Stulz and H+E had widely different trajectories over 2014-2023

On one end, Stulz-Planaqua served as one of the first keystones in the SKion Water building, that’s one of the – if not simply “the” – fastest-growing water company in the World, again, if you want to dig into that story, listen to the interview with Reinhard Hübner I mentioned before.

On the other end, H+E sure was the jewel in Aquarion’s crown, but nothing really changed in a decade. And I can postulate some simple hypothesis as to why that’s as it is. First, Aquarion was backed by an investor with a clear timeline: the Green Growth Fund, powered by the Republic of Tatarstan, was eyeing a 5 to maximum 10-year exit through either a sale or an IPO. Meanwhile, SKion Water is backed by Susanne Klatten, the richest woman in Germany, with the ambition to build a water giant.

Second, betting on Industrial Water growth in 2014 was slightly ahead of the wave, and once the wave started rising, many new actors made inorganic growth or M&A quite more challenging and expensive in the sector, and the likes of Saur/Nijhuis, SKion Water through Ovivo, when not simply Xylem or Evoqua got the Lion’s share.

Is there something odd with H+E?

Third and more confusing, it simply seems to be something odd with H+E. When someone else is touching a technology, it’s cool and game, but when it’s H+E it’s hard to believe and prudent to step back. Let me give you an example: when 374Water comes up with a supercritical water oxidation technology, it’s cool and game, and they were still valued at nearly 700 million dollars in April of this year with a technology that’s very promising but still to industrialize. Meanwhile, when H+E markets supercritical water oxidation for a good while through its Aquacritox business unit, it raises an eyebrow, when not simply skepticism.

Now, that third kind of subjective reason is also the one that makes this month’s move by Gradiant the most intriguing and interesting to follow.

Gradiant acquires H+E

In short, on the 1st of October, Gradiant announced that it acquired 51% of H+E, with the goal to ramp up its share to 100% within the next twelve months.

In case you don’t know Gradiant, they’ve been founded at MIT and have experienced rapid growth in the US and mostly Asia, by offering water and wastewater treatment technologies and services to the industrial world, with a specific focus on semiconductors, pharmaceuticals, food & beverage, lithium and critical minerals, and renewable energy.

The only Water Unicorn

Now, they’re also well-known for their funding round this May, as their 225 million dollar Series D officially made them the first and only unicorn in the Water Sector.

So, after all of that, it’s maybe time to answer my opening question, don’t you think so?

Will Gradiant succeed with H+E where Suez, Stulz, and RENA failed?

I could open with a very subjective pessimistic reason: it didn’t work for anyone before; why would it work for Gradiant? Well, probably because Gradiant goes at it differently than the others. H+E has been rumored to be on the verge of being sold several times over the past months. One deal even fell through quite late into due diligence. All these deals were more or less about the technological expansion of an existing range. I feel like Gradiant sees that differently.

They have no footprint in Europe, and here they’d be one-to-one, extending their sales reach with a 90-year-old player. Will they trash H+E’s technology and capabilities? Certainly not. But they’re more interested in the 30’000 existing references, in my humble opinion.

Plus, this kind of expansion investment is the way Gradiant has quite successfully been working in Asia, and H+E also has an Asian presence, so that may lead to some synergies – even though you know how little I believe in synergies.

It will be (almost) all about the people!

But the real make or break of this deal is the people. If I’m trying to make a mental list of the water technologists I esteem the most, many of them have been working for H+E at some point. I could open a full digression and explain why, usually, working for a struggling or cash-short company is an incredible learning experience, as you’ll have to go above and beyond. You’ll maybe burn out, but you’ll learn a lot.

So, H+E surely still has a wealth of great people. Hence, the challenge becomes: how do you leverage the best out of their knowledge while making them pivot toward the business model and mentality of the sole and only water unicorn? A part of the answer lies in the integration strategy Gradiant wants to implement. I’d be super curious to see how that unfolds, so you can be sure that I’ll update you if there’s anything to say about it.

Has the Water Sector given up on H+E?

Some last few words: I’ve been super surprised to see how little reactions that move triggered. Every social post by the specialized press or the two groups about that acquisition merely got a couple comments, so I’m not expecting you to be that much still with me thus deep into this episode, yet I thought H+E’s rich history was worth this crazy extra-work.

And I think for anyone interested in water M&A and investment and how to do it right, there’s a ton to learn along that path, and probably some more with the future developments of the Gradiant/H+E story. I’m actually preparing further episodes along those same topics; the interviews are recorded, most of the research and some of the editing are done as well, trust me, there are some nuggets inside, so make sure to not miss out by subscribing to this channel.

7 Reasons Why Gradiant may fail in its H+E Acquisition

To perform, you need to know what to overcome, right? So here are my top 7 reasons for that merger move to fail (even though I’m pretty positive it won’t).

1. Mismatched Business Cultures: Hager und Elsässer’s history is fraught with failed mergers due to incompatible company cultures. Cultural compatibility, or lack thereof, often dictates the long-term success of a merger. It’s not just French-German relations that failed to gel; it’s a broader narrative that suggests H+E might not play well in the sandbox with others.
2. Investor’s Exit Strategy: Aquarion was backed by the Green Growth Fund, eyeing a 5-10 year exit. Gradiant, given its rapid growth, might be more interested in long-term value creation. Unless they’re aligned on this, it’s a ticking time-bomb waiting to go off.
3. The Innovation Paradox: H+E’s innovative technologies, like their supercritical water oxidation unit, have been met with skepticism, not enthusiasm. You’ve got to wonder, if they can’t get market buy-in for their innovative technologies, how are they going to gain traction in a merger that should, in theory, be all about scaling and expanding?
4. Market Timing: H+E’s focus on industrial water was slightly ahead of its time in 2014. But the wave has since started, and the likes of Xylem and Evoqua have already caught it. H+E not only missed the wave but is also now in a market where M&A has become expensive and challenging.
5. Capital Drain History: Financial nightmares in Russia and Turkey, liquidity crunches – H+E doesn’t exactly bring a treasure chest to the table. If Gradiant is looking for an asset-light acquisition, they might be biting off more than they can chew.
6. Limited Growth Under Aquarion: H+E has stagnated over the last decade under Aquarion. While they were the “jewel” in Aquarion’s crown, it’s like being the tallest dwarf; impressive in context but less so in the grand scheme of things.
7. Gradiant’s Sectoral Focus: Gradiant is big on semiconductors, pharmaceuticals, and renewable energy. While H+E has industrial water experience, their trajectory hasn’t been as sharply focused. There’s a risk that Gradiant could find H+E to be a square peg for their round hole.