How Transformational Is The Xeros Tech Deal?

Xeros Technologies (LON: XSG) shares are up 15% on the back of their announcement of a “transformational” deal. This will come as something of a welcome relief to long-term holders who have lost up to 80% of their money over the past year as the Xeros share price declined from just under 250p to 39p.

There are two things we've got to ask ourselves, firstly, is this a truly transformational deal? Secondly, has the share price already reacted enough, too much, or not enough?

Xeros management themselves do say that the deal is transformational: “Hanning components are incorporated in the washing machines of some of the world's leading brands and therefore this agreement is transformational for Xeros.” Yes, Ok.

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The business line they're in is filters to capture micofribes and microplastics from washing machine cycles. Rather than their being discharged into the sewers with the waste waters they are captured. This is an area of significantly rising interest because varied countries are now starting to say that such filters must be installed on new machines as they are connected up.

Of course, the best way to sell such filters in volume is to be signed up with the parts supplier of filters to the washing machine manufacturers. Which is exactly what Xeros has just achieved here. The aim for Xeros is, of course, to become the industry standard, but even if they don't quite manage that, getting this far does indicate progress.

As to whether the Xeros share price move is an underestimate, it's possible to think so. Because they themselves tell us what is at stake here: “The ambition we have been working towards is for Xeros' XFilter technology to establish the de-facto standard for legislators and to be the device of choice for all washing machine manufacturers.” Now, the point is that the EU is likely to follow France in making such filters mandatory. That would be nice for Xeros sales, of course. But there aren't many other such filters out there on the market. It's possible that by the time of the mandatory filter, Xeros will still be the only people with something that really works. And that would be a prize well worth having.

This is where a valuation problem for Xeros shares comes in. For we're looking to political action to determine that value for us. Sure, they might have the best filter in the world and all that. But the impact of every matching having to have some such filter would be huge upon the company.

That's what we should really be looking for, therefore. Yes, this announcement of an OEM agreement is good. But what will likely make Xeros shares soar – if they do – is an announcement that a filter of this type will become mandatory on each washing machine. Theere's even the thought that, knowing the EU as we do, that they will do this rather rapidly. But that is the uncertainty as well as the major driver. Do these washing machine filters become mandatory or not?