Good morning, and welcome to the Xylem call. At this time, all participants have been placed in a listen-only mode, and the floor will be open for your questions following the presentation. If you would like to ask a question at that time, please press star one on your touchtone phone. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. We ask that you please pick up on your handset to allow optimal sound quality. Lastly, if you should require operator assistance, please press star zero. I would now like to turn the call over to Matt Latino, Senior Director of Investor Relations. Please go ahead.
Thank you, Maria, and good morning everyone, and welcome to today's call to discuss Xylem's agreement to acquire Pure Technologies. With me today are Chief Executive Officer, Patrick Decker, and Chief Financial Officer, Mark Rajkowski. Patrick will provide some remarks about Pure, our rationale for this strategic acquisition, details about the transaction, and the shareholder value we believe it will create. Following our prepared remarks, we will address questions related to the information covered on the call. In order to have enough time to address everyone on the call, I'll ask that you please keep to one question and a follow-up, then return to the queue. We anticipate that today's call will last approximately 30 minutes. As a reminder, this call and our webcast are accompanied by a slide presentation available in the investor section of our website at www.xylem.com.
A replay of today's call will be available until midnight on Friday, January 12th, 2018, at 11:30 A.M. The telephone replay will be available at 800-585-8367, and the confirmation code is 6374199. Additionally, the call will be available for playback via the investor section of our website under the heading Presentations. Please turn to slide two. We will make some forward-looking statements on today's call, including references to future events or developments that we anticipate will or may occur in the future. These statements are subject to future risks and uncertainties, such as those factors described in the cover slide, as well as in Xylem's most recent annual report on Form 10-K, and in subsequent reports filed with the SEC. Please note that the company undertakes no obligation to update any forward-looking statements publicly to reflect subsequent events or circumstances, and actual events or results could differ materially from those anticipated.
For purposes of today's call, all references will be on an adjusted basis unless otherwise indicated. Non-GAAP financials have been reconciled for you and are included in the appendix section of the presentation. Now, please turn to slide three, and I will turn the call over to our CEO, Patrick Decker.
Thanks, Matt, good morning, everyone. Thanks for joining us today. Today we have an exciting announcement. It represents the next step in the continued execution of our strategy, to be a leading provider of smart technology solutions in the global water industry. We're pleased to have signed a definitive agreement to acquire Pure Technologies, which is a leader in smart infrastructure assessment and management for the water industry. Pure's portfolio complements our recent acquisitions, namely Visenti and Sensus, further strengthening Xylem's leadership in smart water. This is another component of a broad platform offering that we are continuing to build to expand our smart technology portfolio and advance our efforts to improve the economics of our customers' operations. We are very confident that it will accelerate value creation for our shareholders. Please turn to slide four. Slide four provides a high-level overview of the deal.
We are acquiring all shares of Pure, which is headquartered in Calgary, for CAD 9 per share, which equates to a total enterprise value of about $397 million. The transaction is subject to customary Canadian court and U.S. antitrust approvals, as well as the approval of Pure shareholders. We anticipate financing the deal with cash and short-term, low-interest debt. We expect to complete the transaction in the first quarter of 2018. The Pure portfolio is another example of how M&A can be used as a proxy for R&D. With this acquisition, we immediately expand our portfolio in a key area of interest, namely addressing aging infrastructure and non-revenue water. One reason we are confident about the future growth of this business is that we've already been working with the Pure team for nearly a year. In April, we entered into an exclusive commercial collaboration with Pure.
Through that partnership, we have been introducing Pure's offerings in a number of regions in the Middle East and Southeast Asia, as well as India. The early interest has been significant. In a moment, Mark will take you through the financials in more detail, but I'll hit some highlights here. We expect to achieve run rate cost synergies of at least $12 million by the end of year two. One of the immediate opportunities is the elimination of Pure's obligations as a public company, which represents nearly half the expected synergies. We also see opportunities in the area of global procurement, some overlapping footprint, and other efficiencies. We anticipate meaningful revenue synergies over the longer term. For example, we see opportunities to accelerate growth of Pure services in a capital-efficient way by leveraging our extensive network of branches across North America, as well as accelerating their global expansion.
We'll have more specifics about these other opportunities after we close the transaction. As we noted in our press release, we expect this acquisition to be modestly accretive to earnings in 2018. It also meets our return on invested capital criteria. Now, please turn to slide five. I want to take you back to our Investor Day earlier this year and remind you of the strategic work we completed some time ago that identified priorities for M&A. I'm referring to the comprehensive value mapping exercise we conducted to assess the attractiveness of different parts of the water industry. We identified three growth priorities outside our core. Systems intelligence, or the technologies that directly support the transition to smart water infrastructure, advanced and industrial water treatment, and industrial water services. Since completing this work, we've done four deals in smart infrastructure. Pure Technologies, when complete, will be number five.
Like the others, it expands our ability to address more of our customers' challenges more effectively. Pure brings smart solutions that directly address some of our customers' biggest headaches. They are a leader in intelligent leak detection and pipeline condition assessment analysis. This enables operators to allocate scarce resources more efficiently by understanding where there are problems and where there are not problems. Pure will strengthen our technology DNA as well as our existing and future portfolio. They are committed to smart innovation and will complement and enhance our current capabilities. We expect the addition of this team to help us scale more quickly in data analytics and software as a service, both areas experiencing rapid growth as the industry migrates to smarter, more integrated solutions.
Similar to our previous acquisitions, Pure will expand our opportunities in faster-growing markets and strengthen our leadership in systems intelligence across the water industry. Please turn to slide six. Pure's portfolio expands our capabilities, specifically in the areas of infrastructure diagnostics and analytics, enabling us to bring greater value to customers. Additionally, the business will serve as another new growth platform within Xylem. As we bring together sensing, communications, analytics, and control capabilities of Sensus, Visenti, and now Pure, we will increasingly be able to help customers achieve significant savings and deliver better service to ratepayers. Furthermore, we'll be able to leverage existing customer relationships across our brands. In the U.S., this positions us well to capitalize on the increased infrastructure spending we see in municipal markets. As I mentioned earlier, this combination will build upon our existing commercial partnership.
We intend to leverage Xylem's global footprint and strong customer relationships to accelerate Pure's growth. Please turn to slide seven. Let me now provide a few more details about Pure. This is a 22-year-old company based in Calgary with about 500 employees. The vast majority of revenue is generated in the area of pipe inspection. They leverage a highly consultative model in which they work with operators to understand their unique operational challenges and deploy leading-edge technologies that address those issues in infrastructure networks. Specifically in leak detection, Pure's proprietary technologies use sensor capabilities that are recognized as some of the most accurate and advanced solutions available today. They also have a range of services and technologies to evaluate and monitor the integrity of an operator's water or wastewater network, including robotic and free-swimming technologies and specialized solutions to address key challenges.
Some of these technologies are applicable in other industrial sectors as well. Pure generates a modest portion of its revenue in the oil and gas sector. These services are focused on the midstream area of the sector, which has been more resilient to oil price fluctuations. Please turn to slide eight. Let me take a moment to explain why we believe Pure will be a compelling growth platform for Xylem. Water is the most capital-intensive form of infrastructure, and utility operators are grappling with how to manage their aging water infrastructure and the challenges it brings. There are 240,000 water main breaks each year in the U.S. alone. The EPA estimates that the cost of repairing and replacing buried infrastructure for drinking water alone will be $1 trillion over the next 25 years. Then take non-revenue water, an enormous concern of utility operators in many countries.
Leaky and deteriorating infrastructure is a worldwide issue, with an estimated loss of 25%-30% of treated water to leaks, theft, or inaccurate metering. Pure Technologies, in combination with our Sensus and Visenti offerings, enables Xylem to help a customer address nearly all contributing factors in a cost-effective way, end-to-end across the entirety of their water networks. Pure's diagnostic technologies can accurately assess the integrity of buried assets, enabling operators to optimize their maintenance and repair spending. These capabilities provide Xylem with a scalable platform in smart water infrastructure, specifically in the municipal end market, offering measurable value for customers. Pure's revenue growth and margin profile will further our progress in achieving our long-term growth and profitability targets. With that, let me now turn it over to Mark.
Thanks. Please turn to slide nine. As Patrick mentioned, Pure is serving an attractive and rapidly growing segment of the water industry, which is forecast to grow 7%-10% over the next five years. Historically, Pure has grown organically about 9% per year, given the age and condition of the pipeline infrastructure globally and increasing regulations and costs to maintain their networks, we expect this business to grow at a rate of about 10% over the next five years. Our confidence in Pure achieving the high end of the market growth rate is reinforced by the strength of their technology and service capabilities and the growth in their multiyear backlog and pipeline. This growth rate is for the current business and does not include revenue synergies, which we believe will be substantial.
In addition to the attractive top line, we're equally excited about the margin expansion opportunities within the business. Much like Xylem Pure has been on a journey to improve their profitability and efficiency. In fact, Pure has improved their year-over-year EBITDA margin by 360 basis points through the third quarter of this year. Further, they have built a very scalable platform that will generate significant margin expansion from strong revenue growth, as well as from the $12 million of cost synergies to be achieved over the first two years. Therefore, we expect the underlying business model before revenue synergies to generate EBITDA margins over 25%. With this revenue and margin growth profile, Pure meets all of our key financial metrics. From a financing perspective, we're funding the deal from a mix of cash and low interest euro-based short-term debt.
The cost to borrow funds will be 50 basis points or less. We anticipate paying back the borrowings within a year, and as a result, expect the transaction to be debt neutral. As we previously outlined, our target leverage ratio is 2.5x-3x EBITDA, and we expect to be at approximately 2.9x by the end of this year. Therefore, this transaction should not have any impact on our investment-grade credit ratings. With that, let's turn to slide 11, and I'll turn the call back over to Patrick for some closing comments.
Thanks, Mark. Let me wrap up by reiterating how excited we are about the Pure acquisition. This is another example where the whole is greater than the sum of the parts. We are adding to the Xylem family another outstanding business with industry-leading smart technology solutions, expert R&D capabilities, an innovation mindset, and laser focus on creating value for the customer. As one company, we will have distinctive offerings in smart water infrastructure that will continue to benefit from compelling growth drivers globally. That is how we will continue to grow our company and create significant shareholder value. Before turning it over to Q&A, let me take this moment to reaffirm our full year 2017 guidance that we provided during our third quarter earnings call. Operator, let's open up for questions.
Thank you. The floor is now open for questions. At this time, if you have a question or comment, please press star one on your touchtone phone. If at any point your question is answered, you may remove yourself from the queue by pressing the pound key. Again, we do ask that while you pose your question, that you please pick up on your handset to provide optimal sound quality. Our first question comes from the line of Deane Dray from RBC Capital Markets.
Thank you. Good morning, everyone.
Good morning, Deane.
Hey, congratulations on getting to the finish line on this. It makes lots of sense from our perspective because it does move you up the water technology curve. We've met with Pure multiple times at big trade shows, so we're familiar with the technology. One of their issues was always the challenge of finding the right business model as a standalone company, it makes a lot more sense for it to be integrated into your Xylem's platform. How does this all fit together now in a go-to-market strategy? You've got Sensus, you have Visenti, now you've added Pure. Maybe give us a little bit of color and insight into the go to market for both diagnostics on infrastructure, non-revenue water, and how does this integrated business grow over the next five years?
Sure, Deane. Thanks for the support on this. We are excited about it. Obviously, we'll have more that we'll share after we close the transaction on the go-to-market strategy and what we believe the size of the revenue synergies can be as a result of that. I would say, generally speaking, one of the many things we like about the Pure capability is not just the technology, but also the consultative capabilities they've got in working with the utilities on taking a very objective look at assessing their overall infrastructure, before we then determine, is it an issue around non-revenue water? Is it an issue about optimizing the existing assets? We think it will give us an even broader span here.
As they work with utility and identify the biggest pain point there, we can then work ourselves as well as with other partners to bring in that optimal solution to the customer. I think it's a nice overlay for us on top of what we already have with respect to Visenti, Sensus, and even some of the technology that we got from our HYPACK acquisition a couple of years ago.
The idea of integrating these businesses, one of the big pieces is big data, as part of the smart water platform is you're going to be just inundated with all this data in terms of all the sensors that you'll have.
Yeah.
Where do you stand in terms of the ability to put analytics on top of this for decision making, both for you as a service provider, but also for your clients? Are there further-
Yeah
investments you need to make in big data?
There are certainly some further investments that we need to make as we scale up and build out things internally. Certainly, part of this acquisition as well was to get greater scale here on the data analytics capabilities that Pure already has and was building out. I'd say whatever investments we need to make there have already been reflected in our preexisting long-term targets for Xylem, as well as in the numbers that we put forward here in terms of the EBITDA margin expansion for Pure. These things will not be over and above what we've already communicated.
Having said that, Deane, I think the capability really comes down to what we're excited about is Both with the team from Pure, the team from Visenti, and the data analytics team in Sensus, what we've always been impressed by with these three different teams is their ability to take reams of data and turn that into very simple, actionable insights for the utility. The challenge they're facing, while they're difficult and challenging, they're not extraordinarily complex. The data's complex, really honing that in on what are the two or three things the utility actually needs to go do to solve that problem is what we've been most impressed by.
All good to hear. Congratulations again.
Thank you, Deane. Happy holidays.
Our next question comes from one of Joe Giordano of Cowen.
Hey, guys. Good morning. This is Tristan.
Good morning, Joe.
Good morning, Joe.
I'm Tristan for Joe, sorry.
Oh, hey, Tristan.
Patrick, I believe you talked before about the non-revenue water and the way you wanted to tackle this issue. As you look at your portfolio today, do you see any other sort of technology that you need to go deeper there?
It's a great question. There are a number of attractive companies out there and technologies that address various aspects of non-revenue water, whether it be on the leak side, whether it be theft and hijacking of water, whether it be driving more accuracy in the metering and therefore the billing accuracy. I don't feel that with this, that we would have any major gaping holes at that point. There are still some other interesting, very small kind of tuck-in bolt-on opportunities that we were planning on doing anyway that would still be relevant as we go forward. I'd say we would feel very good about the comprehensive nature of the solution here once we complete this deal.
Thanks. Then I don't know if you can talk about the level of recurring revenue of Pure Technologies.
Yeah. This is Mark. They've grown historically organically about 9%, there's been some lumpiness in there. The underlying market growth rate we expect to be in the high single digits to 10%. As far as recurring revenue goes, of that, we'd expect roughly 50% to be recurring revenue.
Great. Thank you, Mark. Thank you, guys.
Thank you.
Thanks.
Our next question comes from one of John Walsh of Vertical Research.
Hi, good morning, and congrats on the announcement.
Thank you. Good morning, John.
Hey. I guess just kind of thinking about where you want to keep leverage for the company, clearly still plenty of firepower here. Can you talk a little bit about the pipeline and if there are kind of several more deals around this size or else in there?
Sure. This is Patrick. We keep a very healthy M&A pipeline, and there aren't many technology deals or quite frankly other deals in the water space that we certainly don't get a phone call about or have line of sight to. As we said before, we prioritize the three focus areas as I talked about in my opening comments. Within those areas, we still see a healthy pipeline. There are a number of other opportunities of certainly this size, some larger than that. I wouldn't say there's a lot of those, but certainly some others that are larger than this. We do think it's important to maintain a healthy investment-grade rating. That certainly is what we intend to do.
I think we've also been able to hopefully demonstrate here that we've been successful thus far in negotiating and structuring these deals in a way that is most capital efficient for us. Mark, you want to add?
Yeah. I think that's well said. The other point would be if there is something out there that is particularly attractive in terms of value creation for our shareholders, we would also look to equity as a source of funding. In this case, in this immediate transaction, we're able to fund it with cash and short-term debt.
Got you. Then I guess, a broader market question here. You talked about 10% growth for the asset and kind of reiterated your view of strong municipal markets. I would agree with that. One thing that is kind of a wrinkle that we're trying to get our head around and would love any insights you could provide is, with the tax bill and the potential change around the state and local tax, and what kind of impact it might have to some of your customers, obviously still some moving pieces there, but just didn't know if you had any kind of insights to offer there as we're all trying to figure out what tax reform means for the broader market.
Sure. Yeah, it's a good question, John. I would say, obviously, it's hard to tell at this stage. There's a fair amount of speculation, and one could argue either side of, is it going to be a net negative impact for customers at the utility level? Is it going to be a net positive? The reason I even throw the net positive out there is I think there's an argument to be made that even if you do begin to see a shift in population away from certain metropolitan areas, where they go to is going to lead to further build-out, and the need for new water infrastructure support that. You could argue around many of our large metropolitan areas, the existing water infrastructure, it's already been built, but it has to be maintained.
There's not a lot of new infrastructure being built in these large metro areas to begin with around water. You could also argue maybe it's a net positive, I don't go there, because I think it's just way too early for us to speculate on what the impact is going to be of that particular line item in the tax bill.
Great. Appreciate it. Thank you.
Okay. You're welcome.
Our next question comes from the line of Scott Graham of BMO Capital Markets.
Hey, good morning.
Good morning, Scott.
I have a couple of questions for you here. First of all, how big now is your, including this, diagnostics analytics platform?
I think it depends on how you define that. If you're talking about purely software as a service analytics, Pure, not to use no pun in the word Pure, but the kind of purely defined SaaS data analytics, we're probably talking about, it's roughly 15%-20% of our Sensus revenue. You throw this on there now, you're probably talking, I do the math on that, I'm trying to do math here in my head. I'm doing farmer's math. You're probably talking less than 10% of our total revenue at this point.
Right.
Growing rapidly. Growing very strong double digits.
I guess I was thinking about more Visenti and the base business analytics. Is there a different way to cut that?
Yeah, if you add it all up in terms of total dollar amounts, you're probably talking somewhere around $200 million, $250.
Okay, great.
That's basically this revenue. It's the revenue that we've got in our Sensus business that we acquired that's purely data analytics software as a service. Then, of course, the Visenti business.
That's fine. Great. Thank you.
Yeah.
The EBITDA margin, there was a comment, I think, made that you expect this thing to be an over 25% EBITDA margin without cost reductions from you. Is this it yet?
No. This is Mark, Scott. That's without revenue synergies.
Oh, I'm sorry.
No, they're a smaller company. They don't have a lot of scale. When you look at some of the costs around just public company costs and some of the other opportunities around procurement, productivity, operational discipline, there is quite a bit of cost synergy that we see, and that drops right to the margin line.
Scott, roughly half of the $12 million that we talked about in cost synergies are going to come from removing public company costs.
Yes, I'm with you on that.
Okay.
I guess the final thing is that, you look at the consensus estimates out there for Pure, it is very supportive of what you're saying. If I may, though, there has been some lumpiness. The last couple of years in particular have been slower.
Yeah.
Is that more sort of a general industrial recession issue, or is there something more behind that last couple of years, a little slower growth?
Yeah, I think it was really a couple of things. If you go back to 2016, some of the performance there was driven by the economic conditions in Canada, which is really not unlike what we saw in our Xylem based businesses, just it was more concentrated for them. Here recently, they had some project deferrals. They had the integration and realignment of their Wachs Water business. That acquisition back in 2015. They've worked through some lumpiness there, some of the market, some of it integrating some things on their own. I would also say it's just the scale of the company.
One of the biggest benefits here is our channels to market, both here in North America, but also globally, and giving them a much larger canvas to paint on will also reduce that lumpiness in terms of what you would have seen on a historical basis.
Yeah, it makes sense. Okay. I guess my last question is, and I was actually writing, but I forgot my last question. When it comes to the cost centers, a lot of visibility on half of it, I'm assuming that Anthony Milando has been intimately involved with this, and he's giving you assurances that this is what the company is capable of pulling out of this organization.
Yes, absolutely. We've applied, as you'd expect, a ton of rigor on this in terms of looking at all the opportunities. We've had terrific discussions with John Elliott, their CEO, and the management team as best we could during the period of negotiation. They've been extremely helpful along the way. I'll be heading out to Calgary this evening and meeting with the team there tomorrow morning. No, we're excited about it. We're confident about these areas of opportunity, and it really is about bringing some additional tools and processes around procurement and other operational efficiencies. I know the team there will be very excited to jump on that train with us.
Okay. Actually, sort of last question. You talked about a very low interest expense for this transaction.
Yeah.
Can you kind of walk us through that number?
Yeah. I commented earlier, we're going to borrow in Europe, we expect to be able to do that for 50 basis points or less. Short-term borrowing.
50? Five zero.
50 basis points.
Wow, okay.
Half a %.
Half a %.
Yeah. How?
That's the market.
That's a short-term, though, yes?
Yes.
Oh, okay. You're essentially going to-
Yeah, we're going to pay this back with our cash flow in a year. As I said in my comments, we're going to remain debt neutral. We're continuing to work down towards our stated leverage target of 2.5x to 3x. This is very cheap short-term financing that we'll repay within a year.
Right. Okay. That is what went into your comment about it being modestly accretive in 2018?
That's correct.
Certainly helps.
Very good. Thank you.
Thanks, Scott.
Thank you.
Our next question comes from the line of Robert Barry with Susquehanna.
Good morning. Thanks for fitting me in.
Sure. Good morning.
Good morning.
Congratulations.
Thank you, Robert.
Just a couple of things. I know this is a relatively small transaction. The synergies sound quite good. Can you comment on the deal process, and just arriving at what looks like an over 100% premium you're paying to where the shares were trading?
Sure. Yeah. We won't share much details on the process. This was a competitive process, highly competitive process. Certainly as we looked at the overall quality and value of the business in terms of the technology, the innovative capabilities, data analytics platform. We were not looking at this as your classic industrial equipment kind of comp on a transaction. This is more of a software analytics play. We also were thrilled to know that we would be able to drive some meaningful cost synergies here with the collaboration of the Pure team. It gives us really high confidence that we were able to get this multiple down in line with something that was very attractive, especially relative to our current trading multiple. There were a number of factors that went into it, but that certainly is what gave us tremendous confidence.
This has been a thinly traded public company. I wouldn't place too much on a current trading point of a share price if you go back and look over the last couple of years where this business has traded. At any point in time, we kind of read through that, and put what we thought was the right value on the table and happy to move to close.
Got it. Fair enough. Could you just comment on what the deal amortization will be?
We're still working through that. We got to do our valuation work. We'll give you more information on that as we close.
Got you. I'm assuming it roughly offsets what sound like about $6 million of synergies expected in year one.
Yeah. There's a little bit of Again, and it's a small deal, so when you think of the
Yeah
the size of the company and its earnings relative to ours, it moves the needle, but just a little bit.
Yeah. Fair enough. Just finally, out of curiosity, this Wachs segment, it looks like it's kind of really dragging down what otherwise is even much higher margin businesses. What's happening with that?
I think it's just the natural bumps that a team has in doing the acquisition. I know they inherited some challenges there in the business, I would give credit to the Pure team for working through those now. Certainly as we look at the outlook of that business, very confident, very excited about it. Again, I wouldn't read too much into that. I think the Pure team's done a great job of kind of managing through that.
We think there's upside there.
Yeah.
Got it. Fair enough. Thanks, guys. Congrats again.
Thank you.
Thank you.
Our next question comes from the line of Brian Lee with Goldman Sachs.
Hey, guys. Thanks for taking the questions.
Sure.
Just had a couple here, following up on a few of the other ones here this morning. At a high level, can you give us some sort of broad brushstrokes around whether that's coming from expanding internationally or similar to what you did with Sensus, or are you envisioning some new product solutions that you'll ultimately be integrating into the portfolio based off of what you already have in the analytics division?
Sure. Yeah. I'd say at a broad level, the two big themes that are really going to be the showcase here for us is, again, the further build-out of our non-revenue water capabilities, as well as helping Pure expand internationally. I would also say that, we already see opportunities where by having Pure in the offering, in the portfolio, it actually increases our chances of win rates with some of the global accounts. Even where we already have a presence, having them in the portfolio will even strengthen further our offering. There also are some other opportunities here as it relates to, again, they've got some channels to market here that will also hopefully allow us to pull through our Visenti opportunities at scale, more so than we would've even had with Sensus.
There's also opportunities here to leverage our existing service branch network to expand the Wachs Water offerings and opportunities. Those are a few of the key focus areas that we've got in front of us. Again, we'll size those up for you guys at the time that we close the deal.
Okay. Just a second one here from me, and I'll pass it on. Patrick, you mentioned the exposure to Canada and that being a bit of the driver around lumpiness in the Pure business the past few years. When we look at the oil and gas division, 20% overall of sales. Is that largely or all tied to the Canada geo? Can you talk cyclically around sort of where you think that division is in terms of the point in the cycle-
Sure
where we are in trough versus peak?
Sure. Yeah. The key difference here is they are exposed to, again, the middle of the sector. They're not upstream or downstream, it's more midstream, which is very resilient. It's a lot of field services work for existing infrastructure in place. We did a lot of work on that, obviously, during diligence, and we got comfortable and the team really showed us how resilient that business was, even during the worst downturn. They are, I wouldn't say they're countercyclical, but they're pretty resilient to the cycles of oil and gas that you would normally be thinking about in terms of Canadian oil sands and such.
Okay, thanks, guys.
Okay. Thank you.
Thanks, Brian.
Thanks, Brian.
Our final question comes from one of Walter Liptak of Seaport Global.
Hi. Thanks. Good morning, guys, and congratulations.
Thank you.
Thank you.
Good morning.
Thanks.
I don't want to beat a dead horse on the modest EPS accretion, with the low borrowing cost, the modest comment, is that excluding purchase accounting and consolidation charges or is that all in?
There's going to be a lot of amortization related to some of the intangibles. That's certainly going to impact our operating income. It's still, given the cost synergies, and the growth rate that we see in that business, that and the low interest cost, we still expect it to be modestly accretive. That would include the normal purchase accounting amortization.
Great. All right. I wanted to ask about Pure Technologies and how well they've been able to penetrate the U.S. water and wastewater system. There's a lot of other technologies out there that do leak detection and kind of for pipe maintenance, et cetera. How do you think the Pure Technologies stacks up to those other technologies?
Well, we certainly consider this to be another outstanding technology in the area of leak detection, but also asset optimization, more broadly speaking, which is as much of a challenge here in the U.S., North America as leak is. Especially when you think about the spending constraints that many utilities have on the CapEx side. They've got a great offering. They've got a great footprint and platform here. We think that we can help accelerate that growth here and penetration in the U.S. both by way of leveraging our branch network. In a lot of cases, it's about people having feet on the street to go sell these things out of branches. Two, the existing relationships that we have where we are highly penetrated in terms of the water utility space in North America.
There's some more field to play for them as they pull through. The same as we're seeing right now with Visenti.
As you'd expect, as part of due diligence, we did a lot of VOC work, very positively viewed by our customers. Through our partnership, we've been able to see firsthand the reaction that our potential customers are having to their technologies.
Okay, great. Kind of along those lines and maybe as a follow-up to a couple prior questions, the midstream oil and gas, are you expecting that to grow 10% too, or is it kind of a mix of higher growth on the water side, lower growth on oil and gas?
Yeah, that's right. I would say it's, again, oil and gas is only 20% of their revenue. I would say it's always hard to tell, but I would say it's more of a steady play in terms of growth, whereas the water side is the one that's really driving the growth rates.
All right, great. Thank you.
At a higher level.
Okay. Thank you.
Thank you.
Thanks, Walt.
That was our final question. I'll now turn the floor back over to management for any additional closing remarks.
Great. Well, thanks everybody for joining on short notice. Appreciate your interest and support. We're excited to move this to close. In the meantime, Happy Holidays, safe travels, everyone, and we will be back in touch with you when we have our Q4 earnings call early in 2018. Thank you all very much and Happy Holidays.
Thank you. This does conclude Xylem's conference call. Please disconnect your lines at this time and have a wonderful day.