Gaon Group - Israel's Leading Flow Infrastructure Group

Ido Nir
May 29, 2024
10 min read

Introduction:

Gaon Holdings (TASE: GAON-M) focuses on developing and managing the Israeli water industry. They own the majority of Gaon Group (TASE: GAGR), which their expertise covers water, gas, and fluid solutions, catering to global municipal and industrial clients.

The company is also involved in water-related venture investments and international projects, including water purification and waste-water recovery. Gaon Holdings' commitment to the water industry's advancement positions them as a key player in addressing global water challenges.

The purpose of this document is to present Gaon Group and Gaon Holdings, explain some of the challenges in water-related technologies and cleantech, compare Gaon to its competitors, and discuss the effect of the company being publicly traded and owned by a venture capital firm.

I want to note that since I am an electrical engineering student, I wanted to present it from my professional perspective rather than a more financial or legal approach, so this assignment will be somewhat different than what you would expect from a classical evaluation or research of this kind.

Gaons History, Core Mission & Goal:

Although Gaon Group today owns the pipe manufacturing company, the group and holding company began with METCO –The Middle East Tube Company.

METCO was one of the first Israeli tube companies and was initially owned by Koor Industries. In 1998, Benny Gaon, an Israeli businessman and the brother of the famous singer Yehoram Gaon, acquired METCO to be under the holding group Gaon Agro, and the company began entering the water infrastructure industry.

Gaon has completed various projects throughout Israel, mostly by being the supplier and contractor of pipeline installations throughout the country. Some of the pipelines that the company has installed are only a few hundred meters long, but the longest pipeline is up to 70 kilometers long—transporting water from the city of Beit She'an to the center of the Jordan valley. The company has also designed and built a 2.2 mega-watt photovoltaic power facility.

Gaon Holdings' vision is to lead Israel and the world in creating solutions, services, and products in the field of liquid and gas infrastructure. Additionally, Gaon Holdings declares that they are fully committed to the protection of the environment. They manufacture high-quality products to keep the environment and their employees safe. They have also built their factory to operate within the strictest standards of environmental protection.

Until 2013, Gaon Group won auctions to complete very large pipeline projects throughout Israel and bought equity in the pipe manufacturer Plassim. In 2013, the venture capital Viola Ventures acquired the majority control of Gaon and changed the group's structure to its current one.

As of today, Gaon Holdings and Gaon Group are not the same entities but act together with the same executives, so in this article, I will refer to them as the same company, although technically, they are not.

Gaon Group Structure:

Gaon is divided into four divisions. Each division attempts to solve different challenges that involve water:

Infrastructure & Industry Division: offers solutions for projects, from planning to construction and lifetime maintenance. The division is mainly responsible for developing and manufacturing water transportation infrastructure, such as metal and plastic pipes and high-pressure valves.
Building Infrastructure Division: This division provides solutions for the construction field. It specializes in marketing plumbing systems, hot and cold water systems, fire extinguishing systems, air conditioning and electricity systems, communication infrastructure, gardening systems, and more.
Technology Division: focuses on improving water consumption and usage more efficiently, mostly by developing and manufacturing devices that allow electronic control of water systems, namely metering devices. The division's metering systems and infrastructure (AMI/AMR) allow users to monitor their water systems and consequently optimize their usage remotely. The division also develops control and telecommunication systems for their transmitting meters.
Entrepreneurship and Execution Division: executes and manages construction infrastructure projects, such as water, sewage, fuel, and gas. The division works with Gaon's other divisions by implementing their products and expertise in the execution of infrastructure projects such as planting fiber optic and transmission lines, sewage treatment plants, pipelines, etc.

Global Water Challenges & Gaon's Contribution:

Prevention of Water Leakage:

In North America, water leakage is estimated to account for 20-50% of the total consumption. We can also translate this astounding sum – 322 billion gallons of water are used per day in the USA, times an average price of 2.43¢ per gallon, times an optimistic leakage estimation of 20%, we get an approximation of 1.61 billion USD's worth in water, per day, in the USA alone.

Gaon has two subsidiaries that have created solutions for this challenge: Gaon City Technologies and Madey Vered. Those two companies develop and manufacture AMR (Advanced Meter Reading) and AMI (Advanced Metering Infrastructure).

To simplify, they create smart water valves and meters that could be connected to an interface connected to the internet. This allows not only high-volume water consumers like factories or farms but also simple household consumers to detect water leakage early. There is no need to mention how much water and money these types of solutions can save on a global scale.

Treatment and Disposal of Waste-water:

Transporting and handling waste water is less forgiving than clean water. The main reasons for that are as follows:

·Toxicity: Toxic substances are often traced in waste water; hence, leakage can cause an environmental catastrophe and infiltration to groundwater, which requires the pipeline to be customized rather than using standard pipes.
Corrosion: Wastewater often contains corrosive elements, which lead to fast degradation of the pipes containing them, which can cause serious damage to the pipes and the environment.
Biological and Chemical Contamination: Waste water contains microorganisms such as bacteria, viruses, parasites, and germs, in addition to household chemicals, which can pose health risks in the event of leakage. This requires the pipes to be hermetically sealed with very high standards.

These challenges are answered by Gaon's subsidiaries—mainly METCO, Tashtiot Hadarom, Hakohav, and others. They create pipes from conventional materials like steel or unconventional materials like plastic or cement. Additionally, all the Gaon subsidiaries have acquired quality assurance certifications and permits from the Israeli Standards Institute.

Transporting Liquid and Gas to Rural Areas:

Gaon's subsidiary, METCO, is one of Israel's largest manufacturers of steel pipes – The pipes they create are used mainly for water, sewage, fuel, and gas. Their pipes' high standards allow them to provide drinking water, clear sewage, and transport gas and fuel to rural areas.

We can try to explain the challenge of transporting gas and liquids over large distances (to rural areas) by using The Darcy-Weisbach equation. This equation is from a physics theory called hydrodynamics, which focuses on the study of fluids and gases.

The equation is given by:

From this relatively simple equation, we can see why only advanced companies like METCO can create pipes used to transport liquids and gases over long distances— since the distance (L) is very long, the pressure drops drastically.

Because of its advanced manufacturing technology, METCO can compensate by creating pipes with large diameters (D) and making the pipes' inner side very smooth, reducing pressure.

Comparable Companies:

Arad LTD:

Arad (TLV: ARD, ARAD) is an Israeli company that specializes in the development and manufacturing of water metering products. Arad has four subsidiaries12 – Arad Technologies, LTD, which specializes in developing remote monitoring of water metering systems; Master Meter Inc., an American-based company that manufactures water meters and remote reading and managing water facilities; Contaraza, a Spanish company that develops and manufactures water metering systems for the industrial and household sectors; and Watertech, an Italian based company which manufactures industrial and household water meters.

Arad has a much higher market cap than Gaon—1.21B ILS13 compared to Gaon's 135.7M ILS. Arad also owns companies and operates abroad, allowing it to enjoy markets much bigger than the Israeli market, like Europe or the USA.

Netafim (an Orbia company):

Netafim is an Israeli company that develops and manufactures water-related products, such as irrigation equipment, pipes, valves, meters, etc.

Netafim was established at first at Kibbutz Hatzerim after a water engineer named Simcha Blass invented the first water dripper.

A Mexican holding company named Orbia (formerly Mexichem) acquired 80% of Netafim in 2017 at an evaluation of 1.895 billion USD. In 2020, Netafim was estimated to hold 30% of the global irrigation systems market.

Position in The Water Industry:

By market cap and market share, it seems again that Gaon is a David in a sector where Israel already has at least two Goliaths.

In the long run, it seems that Gaon Group will face serious competition that will take its toll on the company and its subsidiaries.

An advantage of Gaon, which is worth noting, is that it is relatively diversified because of the companies it owns. Its companies provide piping, valves, and metering systems. Still, the group also offers planning and execution of water projects, which makes it easier for them to win auctions by beating competitors' offers, which do not include a full package.

VC Investment:

As previously mentioned, in February 201317, The Israeli venture capital Viola Ventures acquired 56% of Gaon Holdings in return for 70 million ILS, valuing Gaon at 125 million ILS. This acquisition made Viola the majority shareholder of the company. Viola's interest in Gaon was mainly in its Cleantech activity.

Founded in 2000, Viola Group is one of the leading Israeli VCs with over $5 of assets under management. The group comprises five distinct investment branches: Viola Ventures, which targets early-stage startups; Viola Credit, focusing on growth and venture lending; Viola Growth (previously known as Viola Private Equity), dedicated to technology-centered growth capital and buyout initiatives; along with Viola Partners and Viola FinTech. Viola is headquartered in Herzliya, Israel, with notable portfolio companies, including Outbrain, Similarweb, Payoneer, ironSource, and many more.

Executives Background:

Chairman of The Board – Harel Beit-On:

Harel Beit-On is a prominent Israeli businessman with a background in hi-tech management and venture capital. He holds a bachelor's degree in economics from The Hebrew University of Jerusalem and a master's degree in Technological Administration from MIT Sloan School of Management. Beit-On's career began as the CEO of Tecnomatix Technologies, a company specializing in manufacturing processes and product lifecycle management software for industries like aerospace and automotive. After leading Tecnomatix for 11 years, he orchestrated its acquisition by Siemens. While at Tecnomatix, Beit-On co-founded Viola Group, now one of Israel's largest venture capital firms. He also established Viola Growth, a subsidiary fund of Viola.

Beit-On has held directorial positions in companies such as Similarweb, Pyramid Analytics, EX.CO, Behalf, and Cyberint, a Check Point Company. Harel has been serving as the Chairman of the Board at Gaon Holdings since 2013.

Chief Executive Officer – Guy Regev:

Guy Regev, the CEO of Gaon Holdings Group for the past decade, brings a wealth of experience in law, accounting, and real estate. Holding a Bachelor of Laws (LLB) degree and a CPA (accounting) degree, Regev started his career as the CEO of Blue-Green Water Technologies, specializing in water restoration products and data analytics for water bodies research. He also served as the Vice President of Shikun & Binui, a major real estate and infrastructure development company in Israel.

Guy Regev's leadership at Gaon Holdings has been marked by a decade of strategic decision-making and growth within the water sector. His diverse background in law, accounting, and real estate positions him uniquely in steering Gaon Holdings toward success.

CEO of Gaon Technology – Moshe Misgav:

Moshe Misgav, the Chief Executive Officer of Gaon Technology for the last five years, is a seasoned executive with a background in accounting and economics. Holding degrees in both fields from Tel Aviv University. Misgav has accumulated nearly two decades of experience in various leadership roles. His journey includes serving as the Head of Research at DS-Apex Investment House, Director at Meitav - מיטב בית השקעות, and Director at INTERCURE, a medical-tech company. Before assuming his current position as the CEO of Gaon Technology, Misgav was the VP of Business Development at Gaon Group. Moshe Misgav's multifaceted experience positions him as a key figure in driving technological innovation within Gaon Holdings.

Final Thoughts:

It seems to me that the ultimate way for Gaon to beat its competitors and expand its market share is to collaborate with its investor, Viola. Viola has the ability to invest in deep-tech, water, and renewable energy-related startups and, in later stages, merge their technologies into Gaon's projects and companies.

The innovative and swift R&D capabilities of startups, combined with the stable companies that Gaon owns that can manufacture in very high volume in an almost immediate manner, might be a strategy that will make Viola's investments ripen faster—making Viola's investments achieve profitability much faster. Gaon would reap the benefits of integrating new technologies into their products.

Here are a few suggestions for types of technology that could benefit Gaon's products and solutions:

Water - the most obvious field to enter for Gaon's uses. For example, new technologies for water purification and water quality diagnosis.
Material Engineering - Finding new materials or manufacturing procedures that Gaon could implement for their use.
IoT - This already exists in Gaon's AMI/AMR products but may be limited to environments with limited infrastructure, like large farms or fields.
Robotics - This could be beneficial for relatively easy-to-automate procedures, such as pipe cleaning or restoration.
Analytics - could be implemented in water monitoring solutions like Gaon already sells.

And to leave you with one final thought - Gaon has a unique advantage over its competitors – it has exposure to new technology that is yet to exist in the water infrastructure industry through its investor, Viola, an advantage not to be ignored.