Until the credit crisis kicked in with a vengeance, Veolia, the world’s largest water company, was doing reasonably well. But in the past 12 months its share price has halved – a profoundly disappointing performance, especially since utility businesses are generally regarded as being recession-proof.
A new executive management team has been appointed under the leadership of Antoine Frerot, who took over from Henri Proglio after his appointment to head EDF. A new strategic plan has been drawn up based on consolidation rather than the aggressive expansion of the past. It recognises, too, shareholders’ deep concerns about Veolia’s stretched finances, which – along with a hefty dividend cut and credit rating uncertainty – have been key factors in the company’s share price performance.
Frerot has specified five priorities. Two focus on the operational side with a commitment to overhaul the group’s organisation, especially with respect to the overlap between its water, environmental and energy services operations.
The other three are financially driven. At the operational level, cost savings of €420 million (£330 million) are targeted by 2015. Veolia’s high net debt of c€15 billion is to be cut to below €12 billion by the end of next year. To achieve this challenging debt reduction target, Veolia wants to raise more than €5 billion though divestments during this year and next.
As part of this programme, Veolia has sold its UK water businesses (the former Three Valleys, Folkestone & Dover and Tendring Hundred supply areas) to Rift Acquisitions, an infrastructure fund owned by insurer Prudential and US bank Morgan Stanley. Rift has bought a 90 per cent stake, placing a healthy £1.2 billion value on the business. It paid a premium of around 30 per cent to regulated asset base, demonstrating the attractions of long-term cashflows.
Veolia has also put its Transdev transport business up for sale, which reportedly caused boardroom rifts between Frerot and supporters of Proglio. Transdev is involved in many international transport businesses, most notably in urban bus service provision.
Veolia’s pole position in the French water and sewerage market is crucial to generating cashflow, but Frerot has decided to scale back its operations elsewhere. The aim to reduce Veolia’s geographic footprint from 77 countries to almost half is radical, and unusual for a French national champion, but needs must.
Outside France, Veolia’s focus will be on central and eastern Europe and China, as well as growing its UK waste operations and its US energy services. Indeed, what are now categorised as core markets make up something of a patchwork quilt. Waste in the UK is fine but not water; in the US, energy services are OK but not solid waste – Veolia’s operations there are now for sale. Since these decisions are primarily financially – not commercially – driven, anomalies abound.
In summary, Veolia is undergoing a radical transformation, and the new policy is a major retreat from the can-do global philosophy of the past. Frerot is banking on it resulting in a share price rally.
Nigel Hawkins is a director of Nigel Hawkins Associates which undertakes investment and policy research
This article first appeared in Utility Week’s print edition of 31 August 2012.
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