Xylem is a powerhouse in the water space and should benefit as a drier climate makes supplies more limited. More recently, it has benefited as investors have turned to the strength and stability of its business model amid economic uncertainty. Xylem has reliable demand from the municipal water utilities it works with. The result was a stock that trades at an attractive multiple even as the broader market struggled. On Monday, Xylem decided to put that muscle to good use: the company agreed to buy water treatment company Evoque Water Technologies for $7.5 billion in an all-stock deal. Evoque shareholders will receive 0.480 Xylem shares, or approximately $52.89, for each one. That’s a 29% premium to Evoque’s stock close on Friday. “That’s not what we had in mind!” Evoque shares jumped 14% on the news, but Xylem shareholders are balking at what they see as a costly transaction. Its stock fell about 9% and an analyst at Raymond James said the acquisition was “absolutely not what we had in mind!”. Read more The world lacks fresh water. How to invest in companies trying to prevent this crisis Xylem management has been eyeing Evoque for some time, analysts say. When it went public in 2017, Xylem reportedly tried to buy it. “Honeywell would also have been interested and since then we believe AQUA is at the top of XYL CEO Patrick Decker’s wish list,” Gordon Haskett analyst Don Bilson wrote in a research note on Monday. “It turns out that Decker, over the years, hasn’t been shy about discussing mergers and acquisitions. And not only has Decker openly discussed his desire for a transformational deal, but with XYL trading north of 20x l ‘EBITDA, he pointed out that he has the firepower to make such a deal. AQUA 1Y mountain Evoque is a leader in PFAS remediation In announcing the transaction, the companies announced $140 million in cost savings they expect to achieve within three years of closing. Cost savings estimates ‘could be low’ “It could be low,” Bilson said. The combination could have the power to accelerate revenue growth, several analysts said. They see Xylem using Evoque’s contacts to further penetrate industrial, healthcare and utility markets, and Xylem’s multinational scale could help Evoque expand its business outside of the United States. Currently, Evoque’s operations are 90% in North America. According to Bilson, Evoque presented itself as a leader in PFAS remediation, which he said should “benefit from a long tailwind as work in this area really begins to grow.” There has been growing demand for the elimination of this chemical “forever”, and the service is expected to become a larger part of Evoque’s revenue over the next five-plus years. In a research note, Citi analyst Andrew Kaplowitz said there was “compelling strategic logic” in merging the two companies since their product and service offerings were complementary. However, he was not surprised to see Xylem shares trading on the news, as the deal will dilute the company’s earnings in 2024. XYL 1Y mountain Xylem shares are selling following the deal with Evoque This is one of the issues raised by Raymond James analyst Pavel Molchanov. He wanted Xylem, which has long been a consolidator in the industry, to make an acquisition — he even cited the lack of closing deals in his title downgrade earlier this month. However, Molchanov said he didn’t expect this combination – the biggest water technology deal ever – to be the right one. Not only will this not increase Xylem’s earnings in 2024, but it also presents a high degree of integration risk because there is so little overlap in the two companies’ businesses, he said. The transaction is expected to close mid-year and is subject to shareholder approval. Xylem shareholders will own 75% of the combined company, while Evoque investors will own the remaining stake. Molchanov said he’s not so sure Xylem’s investors will want to approve the deal, although he admitted that “very few management-approved buyouts are vetoed by shareholders.” Evoque stock trading does not appear to indicate expectations of a competing bid, and some analysts have said they do not expect it. However, asking Honeywell to come up with a counter-proposal “wouldn’t leave us in awe either,” Bilson wrote. Companies operating in the broader field of water treatment could be of interest in the years to come. Water has been scarce in many areas due to climate change. The water treatment services that these companies can provide are seen as a key element in trying to solve this problem. – CNBC’s Michael Bloom contributed to this report.