Deal Snapshot: ESG Operations, Inc.

ESG Operations, Inc. is a leading provider of non-discretionary and highly technical water, wastewater, and infrastructure solutions to municipal and industrial markets. Harris Williams recently advised ESG on its merger with Inframark, LLC.  

Here, members of our Energy, Power & Infrastructure Group discuss why water and wastewater services companies like ESG are a compelling investment and what made ESG particularly attractive. They also explore what other buyers should know about this space.

What is appealing to buyers about the infrastructure services industry, especially water and wastewater treatment?

Semple: This industry has several powerful tailwinds. On one hand, water and wastewater infrastructure has suffered from decades of underinvestment, leaving most municipalities and utilities with aged and deteriorating assets. At the same time, there has been a decades-long trend of these municipalities and utilities outsourcing their non-core services to specialized providers. Finally, the regulatory regime and compliance standards are becoming more and more stringent. All of this is putting more emphasis on the efficient and effective management of these facilities. It is the most essential and specialized service a municipality can outsource, so having the right provider with a track record of success is absolutely critical.

White: There’s no question that we are going to see a strong influx of capital into this sector and it’s badly needed. As an example, most U.S. drinking water pipes will need repair or replacement by 2040¹. The latest infrastructure bill earmarks $82.5 billion for critical water-related infrastructure investments, with the majority going to grants to promote clean water and wastewater infrastructure. Between the billions of dollars of funding available for infrastructure upgrades and more municipalities outsourcing their water and wastewater management, this industry has incredible growth opportunities on the horizon. 

¹American Water Works Association, State of the Water Industry, 2021

What made ESG Operations a particularly attractive asset?

Waller: ESG was a well-operated, well-functioning, scaled, multi-service platform within a great space. One area in which it excelled was leveraging its success with water and wastewater facility management to unlock other group opportunities in the broader municipal services space. Water and wastewater services are critical for a municipality, and ESG did a great job taking on those facilities and leveraging its success to address other pain points within municipalities’ operating networks. This unlocked significant growth opportunities for the company.

Semple: ESG also excelled in its approach to people. Many of its team members had been in the industry since the 1970s or 1980s and had a deep background in highly technical engineering and environmental service disciplines. They had great institutional knowledge around all of the relevant standards and procedures and could apply them for every type of system they serve.

On the facility side, ESG largely avoided labor shortages by converting municipal employees into ESG employees. It would bring in its corporate and mid-level management structure, but the municipal workforce carried over, which was great for their customers’ continuity. With this approach, experienced employees kept their jobs and had new advancement opportunities within the corporate hierarchy, and ESG didn’t have to fill dozens of specialized jobs.    

White: These traits helped position ESG as one of the few players of scale in this industry. Over the course of its history, the company built strong regional density in the Southeast and became the go-to provider in that region, which led to incredibly strong organic growth.

What should other prospective buyers know about this sector?

Waller: Scale matters in this industry. It enables companies to expand their margins, enhance service capabilities, and reach more customers. A strong track record matters, too. Contracts may require a company to have operated a similarly sized facility before bidding, so deep expertise and solid procedures are critical. Few companies have that scale and experience, so the ones that do are positioned well for growth.

Strong compliance capabilities are crucial too. Municipalities may want to outsource this work, but only if the contract is going to end up with a trusted provider. If water management goes wrong and compliance standards are not maintained, the ramifications can be far-ranging. The right companies must be able to expertly manage these engagements. And if they can, the reward can be decades-long contracts with stable, sizable revenue.

The Harris Williams Energy, Power & Infrastructure Group has significant experience advising market leading providers of technology, services and products across a broad range of sectors. These sectors include energy management; infrastructure services; utility services; testing, inspection, and certification services; environmental services; engineering and construction; power products and technology; and energy technology. For more information on the Group’s experience, please visit the EPI Group’s section of the Harris Williams website.