American Water Works Company Inc. (AWK - Free Report) announced that it will expand footprint of its complementary Homeowner Services Group business by acquiring Pivotal Home Solutions from Southern Company Gas, a subsidiary of Southern Company (SO - Free Report) .
American Water Works will pay nearly $365 million in cash, including estimated working capital. The transaction is expected to close in the second quarter of 2018, subject to necessary regulatory approval.
Complementary Business Expansion
The decision to acquire Pivotal Home Solutions in a way shows American Water Works’ focus on expanding its complementary business in addition to core business. Pivotal Home Solutions conducts a home warranty business and currently operates in 18 states with about 1.2 million customer contracts.
This acquisition will nearly double American Water Works’ existing customer base of its Homeowner Services portfolio. The acquisition will not only help the company in its complementary operations but also provide an opportunity to further expand its core water and wastewater business through cross-selling.
Opportunities for Home Warranty Providers
Home Warranty providers offer solutions that cover a wide variety of home appliances, heating and cooling systems, and line in and around a home.
Despite the fall in new home sales in the United States for the last three months, touching 618,000 in February 2018, the Trading Economics report forecasts that new home sales will improve from the current levels.
We expect that the unemployment level remaining static at 4.1% for the last six months coupled with overall improvement in the U.S. economy will create demand for new homes and new opportunities for Home Warranty providers.
Acquisition in the Water Space
In addition to complementary business, American Water Works continues to expand its core water and wastewater business through strategic acquisitions at regular intervals. During 2017, the company added 39,514 customers through acquisitions. The company is already in discussion to acquire another 23,000 customers through acquisitions.
The old water and wastewater infrastructure needs ample investments, easier for bigger players to make. Consolidation would therefore drive the necessary infrastructure overhauls for the industry at large.
A water service provider Connecticut Water Service announced that it has entered into a definite agreement to merge with SJW Group (SJW - Free Report) in an all-stock transaction. The combined company will become one of the largest water and wastewater service providers in the United States, and serve more than 1.5 million customers in multiple states.
In a year’s time, shares of American Water Works have outperformed its industry. The stock has gained 6.0% compared with the industry’s rally of 5.0%.
American Water Works has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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