Why Evoqua Water Stock Is Up and Xylem Is Down Today

What happened

There's a big acquisition in the water-tech business, and the two stocks involved are moving in opposite directions.

Shares of Evoqua Water (NYSE:AQUA) climbed as much as 13.9%, and shares of Xylem (NYSE:XYL) were down as much as 11.7%, after Xylem announced plans to acquire Evoqua in a deal valued at about $7.5 billion.

So what

The age of taking water for granted has come to an end. A major drought impacting a sizable portion of the U.S. West has focused considerable attention on the stability of water supplies and has put water stocks on the radar of more investors.

On Monday, two major players in the business of using technology to help minimize water shortages announced they were teaming up to create a stronger, more diversified company.

Terms of the deal call for Evoqua shareholders to receive 0.48 shares of Xylem for each Evoqua share they own, valuing the target at about $52.89 per share. That's a 29% premium over where Evoqua closed on Friday.

Post-deal, Xylem shareholders would own about 75% of the combined company.

Xylem CEO Patrick Decker said in a statement:

Solving the world's water challenges has never been more urgent. Our acquisition of Evoqua creates a transformative global platform to address water scarcity, affordability, and resilience at even greater scale. The combined company delivers an unparalleled portfolio of advanced technologies, integrated services, and application expertise across the water cycle.

Together, Xylem and Evoqua generated more than $7 billion in revenue and $1.2 billion in adjusted EBITDA over the 12 months ending Sept. 30.

Now what

The companies believe they can extract upwards of $140 million in costs within three years, which should help margins over time. In doing the deal with all stock, Xylem also keeps considerable balance sheet flexibility, allowing the company to be an opportunistic acquirer if consolidation in the sector heats up.

The companies have a growing range of products and services they offer, but at heart, they are both in the business of water treatment and purification so end users can make the most of the water they have. In a world plagued with droughts and growing water uncertainty, there should be ample opportunities for these businesses to grow over time.

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Lou Whiteman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.