Sun European’s Paul Daccus: Climate change drives need for water management

MegaGroup, which Sun European has agreed to acquire, is a wholesaler of water technic products.

Sun European Partners has identified numerous add-on opportunities in a fast-growing market for MegaGroup, managing director Paul Daccus told PE Hub Europe.

MegaGroup, based in Veghel, the Netherlands, is a wholesaler of water technology products for installers, professional end-users, resellers and equipment manufacturers across northwest Europe. Sun European agreed to acquire the firm in March.

“The reason why we found it attractive is that the underlying market is growing pretty nicely,” said Daccus. “[It’s growing by] around 3 to 5 percent, but that’s across all of its product categories. There are certain areas which are growing significantly quicker than that.”

Irrigation and industrial applications are some of these areas, according to Daccus. He added that a lot of the growth in these segments is driven by increases in regulatory requirements. “But even above that, most corporates now are very focused on making sure that they’re doing more than the bare minimum from the regulatory point of view, particularly around the ESG credentials of those businesses.”

This growth is opening doors for further M&A and consolidation. “We’ve already identified over 160 potential targets, ranging from a €1 million EBITDA up to teens of EBITDA,” said Daccus. MegaGroup’s competitors are smaller regional operators, according to Daccus, but they have “quite nice” customer bases, making them interesting targets for consolidation.

Southern Europe is especially of interest, with Spain a particular target. The region is more likely to suffer more from the effects of global warming, making MegaGroup’s products a good fit, said Daccus. “The use of water for irrigation and making sure any rainwater that does come is properly stored and reutilised is a key driver. We see those markets as requiring much smarter or technical products that use and distribute water better.”

A great fit

MegaGroup ticked many boxes on Sun European’s list of investment criteria. Firstly, the London-based firm wants to invest in defensible businesses. “This business in particular services the professional installer base, which is fragmented, and has a very large number of customers,” said Daccus. “Whereas the suppliers of filters, pipes and water products are large businesses that just can’t deal with that vast number of customers. It has a very defensible part in the market.”

Growth in end markets is another plus. In MegaGroup’s case, the business has a “relatively small” but interesting role in livestock. While pressures around nitrogen are reducing the numbers of traditional cattle, it is opening other doors for the business. “It has pivoted the business nicely towards aquaculture, so fish, shellfish and also marine based plants,” said Daccus. “There are some really interesting growth opportunities for its product set.”

The last piece that drew Sun European to MegaGroup, “more than any other characteristic”, was the fact there are many levers to pull and plenty to work on. “They’ve bought businesses in the UK that require integrating and they’ve just put a new distribution facility in Poland that needs help to get up and running,” Daccus explained. “There is also the really exciting potential to add on more businesses to this platform.”

Daccus also sees potential for a good exit later down the line, as the industry has a lot of large value-added distributors building products. “MegaGroup is not of the scale for those large players to really be excited about. It is also very domestic. But if we’re able to execute our plan to grow the business as we expect, to increase geographical diversity and to prove it is a really strong platform, I think it will be interesting to some of the larger distribution businesses.”

Interest from another PE player could be on the cards too. “If we can also prove this as an interesting buy and build platform where you’re able to pick up some of the smaller players for a sensible multiple and the platform trades at a higher multiple, that would be very attractive to private equity as well.”