Water and wastewater service provider Connecticut Water Service Inc. CTWS announced that it has entered into a definite agreement to acquire Avon Water Company for a total consideration of $36.6 million.

Avon Water caters to nearly 4,800 customers near Connecticut Water’s existing operations in Avon and Farmington. This acquisition will help Connecticut Water increase its presence in the area.

Details of the Deal

The agreement includes the payment of a stock consideration of nearly $26.2 million or 80% and a cash payment of $6.2 million or 20% for a total payment of $32.4 million to shareholders. Connecticut Water will also assume nearly $4.2 million of Avon Water’s long-term debt.

The transaction is subject to approval from Avon Water shareholders and regulatory nod from the Connecticut Public Utilities Regulatory Authority (“PURA”) and the Maine Public Utilities Commission (“MPUC”). The parties plan to file applications with both the PURA and the MPUC in the fourth quarter of 2016, with the deal anticipated to close by Apr 2017.

CONN WATER SVC Price

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Acquisitions to Expand Customer Base

The U.S. water utility space is fragmented and comprises a large number of small operators who do not have the financial strength to upgrade and repair aged pipelines and mainlines. As a result, individually, they are unable to keep up with the rising cost of maintaining and upgrading aged wastewater systems while ensuring the supply of 24x7 reliable water and wastewater services at reasonable costs.

This has made consolidation the need of the hour. Bigger players in the sector are financially better equipped to make the required investments in the old water utility infrastructure. Connecticut Water Service is among the big operators in the water utility space and the company has been making prudent acquisitions since 2011, which expanded its customer base by 45%.

Acquisitions by Peers

Like Connecticut Water, other operators in the water utility space are looking to make strategic takeovers to expand their coverage and customer base. American Water Works Company AWK has closed 10 acquisitions, adding 7,556 customers to its existing customer base. It has another 13 pending acquisitions, which would add 47,845 customers to its existing base.

Aqua America Inc. WTR has also completed a number of acquisitions in its service territories, expanding its existing customer base by 5,396 (up to Aug 2, 2016). Thanks to strategic acquisitions and organic growth, the company expects to increase its customer base by 1.5% to 2% year over year in 2016.

Zacks Rank & a Key Pick

Connecticut Water Service currently has a Zacks Rank #3 (Hold). A better-ranked stock in the water utility industry is Companhia de Saneamento Basico do Estado de Sao Paulo SBS.

Companhia de Saneamento Basico do Estado de Sao Paulo saw its 2016 and 2017 earnings estimates move up by 18.8% and 4.4%, respectively, in the last 60 days.The company sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

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