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Siemens Buys U.S. Filter from Veolia
May 12, 2004

By Georgina Prodhan

FRANKFURT (Reuters) - Siemens unveiled a billion-dollar acquisition of North America's largest water company on Wednesday, its first major deal since signaling it was ready to spend some of its $15 billion in cash expanding its portfolio.

The German engineering group said it would pay Veolia Environnement $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.

``This acquisition is an important step in the framework of strengthening our group portfolio,'' Siemens Industrial Solutions and Services (I&S) chief Joergen Ole Haslestad said in a statement.

``The growing water business will play a critical role within our industrial activities at Siemens,'' Haslestad said. ``With it, we will be able to expand our product and service offerings for our customers, in particular within the world's largest water market, the U.S.A.''

The businesses acquired by Siemens have annual sales of $1.2 billion and employ around 5,800 people.

Veolia has for the past year been selling assets relating to US Filter -- a legacy from former parent Vivendi -- which cost it 2.2 billion euros ($2.6 billion) in writedowns in the first half of its fiscal year.

GROWING MARKET

GE began buying water treatment companies two years ago in a bid to exploit a global trend of dwindling water supplies and greater demand.

The world's water market is worth some $360 billion annually and is growing at a rate of six percent, with services and equipment accounting for around $40 billion, according to GE.

``It's really a very attractive market,'' said analyst Axel Funhoff of Bear Stearns, and Andre Jaekel of ABN Amro said the acquisition made ``a lot of sense in our view given the increasingly favorable environment.''

Jaekel said Siemens would be able to leverage its global distribution to sell the products outside the United States, but added it would probably have to restructure the business to match GE's 15-percent operating margin in water.

Siemens has consistently emphasized it would be picky about the profit margins of prospective takeover targets, as all its units have closely watched operating margin goals set by Chief Executive Heinrich von Pierer.

The head of Siemens' Medical unit told Reuters last week it had let British healthcare firm Amersham go to GE last year because the price of $10.4 billion was too high, although such big acquisitions were not ruled out.

By 5:52 a.m. EDT Siemens shares had fallen 1.2 percent to 57.45 euros, underperforming the blue-chip DAX index, which slipped 0.5 percent. Veolia was 2.5 percent higher at 22.30 euros, against a flat European utilities index.

STRATEGIC MOVE FOR VEOLIA

Veolia said in a statement the disposal was ``a major step in the strategic refocusing of Veolia Environnement's water activities in North America on long-term contracts for both municipal and industrial clients, as announced last September.''

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.

Siemens and Veolia said they expected to close the deal, which is subject to regulatory approval, by the end of September. Deutsche Bank advised Veolia on the deal. Siemens declined to say who its adviser was.

Siemens said the headquarters of the new company, which would become part of its Industrial Solutions and Services group, would remain in Palm Desert, California. U.S. Filter's other main base among its 120 locations around the world is Houston, Texas. (Additional reporting by Rebecca Harrison in Paris)

2004 Reuters