Two French giants battle for the control of the water sector
For years, there have been alleged talks, backbiting and clashes between Suez and Veolia over market share. But on August 30, Veolia made an official move on Suez, its biggest adversary.
It all began on a hot and humid Friday morning, July 31, when the French electric utility company Engie announced a “revue stratégique”, a strategic review of its services activities, including a plan to sell some of its assets that had most suffered during the coronavirus crisis.
When asked about the company’s 32% stake in Suez water and waste group, Engie CEO Jean-Pierre Clamadieu said that all options “were open.” This announcement was the beginning of a new saga between two colossi and long-time rivals, Veolia and Suez, for the control of France’s water supply dominion.
If the proposal is finally accepted by Engie, Veolia would then file a voluntary tender offer for the remaining Suez shares
Veolia, which had in 2012 quashed merger talks proposed by its smaller rival Suez, suddenly envisaged a scenario it had not even contemplated seven months previously when the company presented its strategic plan for 2020-2023. And so it was that Antoine Frérot, CEO of Veolia, filed on Sunday, August 30, an offer to buy 29.9% of Suez’s shares held by Engie.
But with what purpose? If the proposal is finally accepted by Engie, Veolia would then file a voluntary tender offer for the remaining Suez shares. “This historic opportunity will enable us to build a French world champion in ecological transformation while accelerating international development and strengthening the new entity’s capacity for innovation,” said Frérot on August 30.
To build a world champion, size matters. Veolia currently has 180,000 employees, generating 27 billion euros (nearly US$32 billion) of turnover for a gross operating result (Ebitda) of 4 billion euros (US$4.7 billion), according to Les Echos. Suez, in its turn, employs 89,000 people, with a turnover of 18 billion euros (over US$21 billion), for an EBITDA of 3 billion euros (US$3.5 billion) in 2019. These two giants together would have a turnover of 41 billion euros and would be present in all five continents.
During the announcement, Antoine Frérot added that: “By combining the very solid skills of Suez and Veolia, this transaction would be able to significantly accelerate the development of the new entity in the face of growing competition, and would enable the industry in France, Europe and the world to meet the environmental challenges of the 21st century.”
Frérot said on a call to journalists that he was particularly worried about competition from water companies from China
Frérot said on a call with journalists that he was particularly worried about competition from China, where water companies are growing quickly and branching out overseas, as well as infrastructure funds buying up assets. “We will one day very certainly see a global Chinese player emerge,” he said.
However, Xavier Regnard, an analyst at Bryan, Garnier & Co., told French media that the term used by Frérot “world champion” should be put into perspective. The market for environmental services is a fragmented market. “Even if Suez and Veolia merged, the entity would represent less than 5% of the world market.” Nevertheless, Regnard believes that the tie-up would allow the two companies to strengthen their international presence, particularly in Asia and the United States. A necessary move if Veolia is looking to grow since, in France, the transnational company would face competition issues as well as a mature market.
Suez, taken by surprise
Bertrand Camus, CEO of Suez, caught off-guard by Veolia’s offer, has energetically refused the possibility of a tie-up between both multinationals and has launched a counterattack to the ambush. In an interview with the French daily Le Figaro on Sunday, September 6, Camus said: “Veolia’s proposal is an aberration for Suez and disastrous for France.”
“Suez does not need to get married: we are already the world leader in water distribution, serving 145 million people,” added Camus.
In his opinion, this proposal is an “opportunistic financial operation” that underrates Suez assets and “underestimates competition issues and execution risk.”
“Veolia’s proposal plans to dismantle 40% of our business in France. The 500 million in savings it envisages will have an impact on thousands of jobs in France as well as for all our clients around the world.”
Cédric Tassin, coordinator of the CFDT at Suez, told Les Echos that he estimates that Veolia's offer could result in the loss of “at least 2,000 jobs" only in France.
This job loss would derive in part from competition issues between the almost duopoly of Veolia and Suez in France. In this context, the CEO of Veolia announced the company had identified an acquirer for Suez’s French water activities, Meridiam, a French infrastructure management company.
“All of Suez's French water activities, as well as the engineering and R&D teams related to this division, would be acquired by this long-term French buyer.”
According to Frérot, Meridiam would provide Suez Eau France with access to the financial resources it needs to realize its growth potential and industrial ambition.
Nonetheless, the sale of Suez’s water activities would be the loss of a strategic sector for Veolia. Suez’s water sector accounts for 55% of the Camus-led firm’s revenue and 41% of Veolia - previously named Générale des Eaux-‘s revenue. If the proposal should go through, some 4 to 5 billion assets would have to be sold.
Certain third parties with stakes in both or either Veolia or Suez have backed the giant’s offensive, including Caisse des Dépôts
In its most recent statement, Suez not only pointed out that the price offered by Veolia to Engie wholly undervalued Suez, but that Veolia’s takeover project came with major antitrust and regulatory issues in France and abroad. “It would lead to a break-up of Suez group with substantial asset disposals that would put the Group’s footprint and technological know-how at risk.”
In relation to selling Suez’s water sector to Meridiam, the group also said that the process lacked clarity and did not provide the necessary level of credibility to comply with antitrust rules and reassure its clients.
Suez fights back
In an interview with the Journal du Dimanche on Sunday, September 13, Philippe Varin, Chairman of Suez, confirmed that the firm was working on a counter proposal. “The management is working on an alternative solution that the Board of Directors of Suez is encouraging. The work is in progress.”
To attract other investors to buy Engie’s 32% stake, Suez needs to raise its shares’ value. To do this, BFM Business reports that the company is accelerating its strategic plan, focusing on the sale of certain ‘weaker’ assets. For the past year, the group has been reluctant to trade in its American subsidiary Suez Water and Spanish subsidiary Agbar. However, according to certain sources, the American branch could be up for sale soon for around 2 billion euros (nearly US$2.4 billion). In this respect, the company announced on Friday, September 11, an agreement to dispose of its entire stake of 53.51% in the Chilian water and wastewater company Empresa de Servicios Sanitarios de Los Lagos (ESSAL) for US$ 92.3 million to Canadian Algonquin Power & Utilities Corp (APUC).
The group is also promising to pay an exceptional dividend on a significant portion of the €3 to €4 billion in revenue from asset sales. This is a means of encouraging potential investors to offer a price at least equal to the €15.5 per share offered by Veolia.
This new scheme will then be presented to Engie, which will have to ask Veolia for more time in order to study the new measures in depth. This setback will provide Suez with a window to put together a solid offer to buy Engie’s stake.
Suez CEO has energetically refused the possibility of a tie-up between both giants and has launched a counterattack to the ambush
Any possible investors? The French private equity firm Ardian confirmed last week that it was in discussions not only with Suez but also with Veolia regarding the sale of Engie’s stake in Suez.
“Ardian is talking with all parties but there is absolutely no concrete operation underway (…), there is no agreement signed with anyone, neither Suez nor Veolia,” said a spokesperson of Ardian to Reuters.
This announcement was made after the French digital daily La Lettre A wrote on Thursday, September 10, that the infrastructure funds Ardian and Antin were putting together a white knight bid for Engie’s stake in Suez. Two attractive investors that would satisfy the French government’s wish to have a majority French ownership.
Antin Infrastructure Partners, based in Paris, is a leading independent private equity firm that recently announced the purchase of a majority interest in Miya Group. Ardian, on the other hand, is a French world-leading private investment house with assets of US$100 billion.
According to the latest news, Spain’s Criteria, the parent company of Caixabank, does not plan to intervene or participate in any consortium that might make an offer for Engie's stake in Suez.
The perception of other stakeholders
Certain third parties with stakes in both or either Veolia or Suez have backed the giant’s offensive. Last week, Caisse des Dépôts (CDC) CEO Éric Lombard, with a 5.7% stake in Veolia and a 1.5% stake in Suez, said during an online press conference that “the creation of a national champion seems a good thing in our opinion(…) It is possible that a friendly deal may be in the works.”
Meanwhile, the French government, which owns 23.6% of Engie, initially showed support for Veolia’s offer by saying that the proposed deal “makes sense.”
Prime Minister Jean Castex said that any proposal should preserve jobs and avoid the creation of monopolies in water and waste and that he would prefer having a French investor in Suez to avoid “a loss of sovereignty in this strategic industry.”
French Finance Minister Le Maire advised both companies to calm down and find a solution in the row over the control of Suez
Bruno Le Maire, Finance Minister of France, added that the country will impartially examine Veolia’s offer for Engie’s stake in Suez and any other proposal that might come up.
However, on Monday, September 14, Le Maire advised both companies on France 2 television to calm down and find a solution in the row over the control of Suez.
“Let’s not offer to the rest of the world the spectacle of a battle between two beautiful French industrial companies.”
“This conflict is useless and we must find a way that will allow both parties to benefit from this operation.”
“The role of the state is to make sure there is no useless war in French capitalism but the creation of value and jobs for all,” he said.
For its part, Engie is not yet convinced. Not because it does not think a French leader in ecological transformation is not an “attractive” idea, but because of the amount of the proposal. On Friday, September 4, the Chairman of Engie, announced that 2.9 billion euros ($3.4 billion) were too low a bid for the company’s 29.9% stake in Suez.
“The value of Suez is higher than the basis of these discussions,” as shown by the 5.7% jump in Veolia shares Monday, August 31. Clamadieu added that Veolia should offer a higher bid for the Suez shares and that he did not discard “other proposals for the shares.”
Repercussions in the international arena
In Spain, Veolia’s proposal could either mean the acceleration of the sale of Suez's stake in Aguas de Barcelona (Agbar), with the stepping up of the SUEZ 2030 strategic plan by the French utility, or it could be delayed even further if the takeover of Suez by Veolia is successful, as it will be up to Veolia to decide on the potential sale of Agbar.
At the beginning of July, Bertrand Camus, CEO of Suez, had said to Bloomberg that at the moment, the firm had no plans to sell Agbar and that an announcement of a possible divestment would be made during the second half of 2020.
The French private equity firm Ardian confirmed last week that it was in discussions not only with Suez but also with Veolia
In July, Camus had also predicted an improvement in the water business for the second half of 2021 after the decline caused by the health crisis, which would have led to the postponement of the sale of Agbar. Advised by Rothschild and Société Générale, Suez had been preparing to begin the process of selling Agbar on June 25, with the intention of complying with the request that the activist fund Amber Capital proposed last year to improve its profitability levels with the arrival of Bertrand Camus as new CEO of Suez.
The sale of 100% of Agbar is valued at 3 billion by the activist fund Amber Capital (12 times EBITDA). A large part of the water company's value is currently held by Aguas Andinas - the Chilean subsidiary - and the price of the potential divestment would therefore depend on whether it is included.
In a letter sent to Suez last year, Amber Capital said that Agbar had reached a level of maturity that suggested a limited industrial angle for the French company to exploit in the future. The sale of Aguas de Barcelona would therefore be a great opportunity to reposition the company and increase its profitability ratios and capitalization.
Will Engie pick Suez or Veolia?
With all eyes on the Engie, Veolia and Suez chessboard, the global water industry must now wait to see the outcome of a move that could transform France’s water sector. With time running out, Suez must present Engie with an attractive proposal with a possible alliance with Ardian and Antin for the electric utility’s 32% stake in Suez to save the company from being dismantled in France. Veolia, on the hand, must increase its initial offer to convince Engie that its proposal is the most attractive on the market.