Denver’s Deep Rock water is building muscle as the new chief executive prepares an acquisition binge to make the company a major supplier of bottled water throughout the West and Midwest.
The 110-year-old company has begun a $200,000 upgrade of its computer system and will invest as much as $4 million over the next year-and-a-half to replace bottling lines and an aging delivery fleet.
“When we get all that done, we will be able to be more aggressive in making acquisitions,” said J. Ronald Frump, who ran Schwann Food Co.’s consumer branded-food business before taking the helm at Deep Rock five months ago.
Frump said he plans to acquire a string of smaller regional companies, with revenues ranging from $3 million to $25 million. He didn’t identify potential targets.
Deep Rock’s owners – Minneapolis-based Norwest Equity Partners, the private-equity investment arm of Wells Fargo, and Denver-based M2P Capital – purchased the company from the family of Merrill Fie in September 2004. The company employs about 125 people in Colorado and another 125 in Minnesota and Nebraska, where it also has operations.
Deep Rock’s core business is in home and office delivery of water used in water coolers. About 70 percent of Deep Rock’s revenues, expected to be $40 million this year, comes from the deliveries.
The ambitious acquisition plan calls for increasing Deep Rock’s reach from the eight states where it is now sold. Currently, Deep Rock distributes in Colorado, Minnesota, Wisconsin, the Dakotas, Iowa, Nebraska and Wyoming. Expansion plans include going into another eight states, including Nevada and Oklahoma.
Frump, a husky 6-footer with a wiry brush of red mustache, has no illusions that the company will enter the heavyweight class occupied by industry giants Nestlé, PepsiCo and Coca-Cola.
“That’s not us,” he said.
And none of the big three is likely to woo the smaller companies coveted by Deep Rock, which had $30 million in revenues last year, said John Sicher, editor and publisher of Beverage Digest.
If Deep Rock’s buying spree builds a regional powerhouse with strong market penetration, the company could become an acquisition target itself, said Charles Ritchie, executive vice president of Business Trend Analysts. Acquisition activity in the bottled-water industry has slowed over the past few years.
But Nestlé Waters, the country’s No. 1 bottled-water company, “has historically gobbled up a lot of regional mom-and- pops,” Ritchie said.
Some of Nestlé’s water brands are Perrier, Poland Spring and Arrowhead.
The investment group that owns Deep Rock has no interest in selling in the near future, Frump said. But in three to five years, a sale might make sense.
“In the future, when the company’s value is such that it is of interest to strategic buyers, they would certainly entertain discussion about selling,” he said. “They made an investment and are looking to reap their return.”
Deep Rock began selling single-serve bottles only after the private-equity group purchased the company from the Fie family.
“We are in that business now as well, and we will invest in that going forward,” Frump said.
Most growth in the bottled-water market in the U.S. over the past five years has been in single-serve bottles, Sicher said.
In 2001, 1 billion cases of portable bottled water were sold. By the end of 2005, the total had more than doubled to 2.2 billion.
“Sugar is no good for you. It promotes being overweight, so people are looking at this as a light alternative,” Ritchie said.
And a single-serve bottle is convenient for people who are on the go, Sicher said.
“You don’t have to go to the water fountain,” he said.
Nestlé, PepsiCo and Coca- Cola dominate the single-serve segment of the U.S bottled-water market.
Neither Coke, which owns Dasani, nor PepsiCo, owner of Aquafina, provides home or office delivery.
Nestlé does have a presence in the home- and office-delivery market, but isn’t a major player in the region where Deep Rock currently operates or where the company plans to expand, Frump said.
Located in Denver’s Five Points neighborhood, Deep Rock’s bottling plant sits 850 feet above a layer of porous, water-bearing rock called an aquifer.
Stephen Kostich, a druggist, drilled the first well at the site in 1896, when the city water company refused to provide service to his outlying property. Soon after that, he formed Deep Rock.
The company pumps well water into clear plastic bottles that leave the plant packed onto tractor-trailers. The company also sells filtered and distilled water.
Not all of the water bears a Deep Rock label. The company bottles water sold by King Soopers under the “Big K” name and Wal-Mart’s “Great Value” brand, as well as for other retailers.
The company also supplies water custom-labeled for businesses that want to promote their own brand.
“That seems to be particularly attractive to people in the real-estate business,” Frump said.
Staff writer Tom McGhee can be reached at 303-820-1671 or tmcghee@denverpost.com.
