Siemens unveiled a billion-dollar acquisition that makes it one of the top US water treatment companies on Wednesday and said it might use its $15 billion in cash to further expand its portfolio.
The German engineering group said it would pay Veolia Environment $993 million for the water systems and services division of US Filter, bringing it closer to rival General Electric in the world's biggest water market.
"More acquisitions aren't ruled out here," a Siemens spokesman said. "We want to make a splash, not mess about with small stuff."
The US Filter businesses acquired by Siemens have annual sales of $1.2 billion and employ around 5,800 people world-wide. The deal allows Veolia to rid itself of a troubled business inherited from former parent Vivendi which has cost it billions of euros in write-downs.
Siemens has repeatedly said it wants to make acquisitions to smooth over gaps in its product offering, which already spans a range from turbines to light-bulbs and X-ray machines to trams under its broad expertise in process automation.
"This acquisition is an important step in the framework of strengthening our group portfolio," Siemens Industrial Solutions and Services chief Joergen Ole Haslestad said in a statement.
"The growing water business will play a critical role within our industrial activities at Siemens," he added. Siemens said it estimated the world's water-related market to be worth some $340 billion annually and growing at a rate of six percent.
Archrival GE, which began buying water treatment companies two years ago in a bid to exploit a global trend of dwindling water supplies and greater demand, says services and equipment account for some $40 billion.
INVESTORS SURPRISED: Siemens shares fell on the news. AT 1500 GMT they were down 2.2 percent at 56.89 euros, under-performing the blue-chip DAX which fell 1.6 percent. Veolia shares were 1.6 percent higher.
"Overall, we are quite puzzled by this acquisition, as it is outside Siemens' existing scope of businesses," SG Equity Research said in a note. "There is a greater need, according to us, for streamlining this portfolio."
But Charles Burrows of Goldman Sachs, who estimated Siemens' exposure to the water services business would now triple, said: "We are encouraged that Siemens is successfully finding a home for its cash and retain our Outperform rating."
Siemens moved to reassure investors who are worried that US Filter would depress closely watched operating profit margins at its Industrial Solutions and Services (I&S) unit, which will absorb most of the new business.
A spokesman said margins at the US Filter businesses were within I&S's target range of four to six percent, and should exceed the range by next year at the latest.
Andre Jaekel of ABN Amro said, however, that Siemens would probably have to restructure the business if it wanted to match GE's 15-percent operating margin in water.
STRATEGIC MOVE FOR VEOLIA: US Filter, bought by Vivendi in a spending spree in the 1990s, has products ranging from bottled water services for homes to the design and construction of large water and waste water treatment systems.
Analysts said it has more synergies with Siemens than with Veolia, which has been selling off US Filter assets for a year.
Veolia said in a statement the disposal was "a major step in the strategic refocusing of Veolia Environment's water activities in North America on long-term contracts". Its shares rose two percent to 22.19 euros, outperforming the European utilities index, which slipped 0.1 percent.
The two firms said they expected to close the deal, which is subject to regulatory approval, by the end of September.
Deutsche Bank was lead manager on the deal to Veolia, with Societe Generale also advising the firm. Morgan Stanley advised Siemens.