Smell of success may be under Suez’s nose

By Peggy Hollinger in Paris
Published: July 16 2008 03:23

They are called the Nose Jury and their olfactory senses are to waste treatment what Betty Grable’s legs were to cinema – vital tools for delivering customer satisfaction.
In the Suez Environnement research centre outside Paris, a group of trained sniffers is taking a “nose break”, between bouts of inhaling air samples collected from water and waste treatment sites around the country. Their fine sense of smell will pick up traces of odorous molecules and identify whether they bring to mind a pleasant pine forest or the stench of dead ­animals.

If someone misses a break, their sense of smell will dull and the tests prove pointless because the researchers would not be able to identify and eliminate the smells that often make sewage treatment works an unwelcome addition to local communities.
That would be a disaster for Suez Environnement, which believes such unique initiatives will do much to reinforce its competitive edge in France and abroad.
Investing in research to build on its position as Europe’s second-biggest water and waste treatment is key to the group’s campaign to woo investors as it prepares to become an independently quoted company from its parent Suez.
The private French energy group will convene shareholders on Wednesday to vote on its merger with state-controlled Gaz de France and that, in turn, will result in a 65 per cent spin-off of the €12bn ($19bn)-a-year environment business.
Jean-Louis Chaussade, chief executive of Suez Environnement, says the sale is a “remarkable opportunity” for his business. After decades of taking the back seat to Suez’s appetite for energy, his group will “have a much higher visibility,” he says. “It will allow us to be recognised as one of the two great environment groups in the world.”
Torrent of data
Suez Environnement runs water management, waste-water treatment and waste management services in 25 countries. Its businesses include Degrémont, Safège, Lyonnaise des Eaux and SITA.
● 68m people supplied with drinking water.
● Waste treatment services for 44m people.
● In 2007, Suez Environnement collected nearly 23m tonnes of household waste, industrial non-hazardous waste, and medical waste, and treated more than 42m tons of waste.
2007 results
● Sales: €12bn ($19.1bn)
● Ebitda: €2.1bn.
● Net income: €1.1bn.
● 46 per cent turnover from European waste services.
● 32 per cent turnover from European water services.
● 22 per cent from international operations.
● 61,915 employees.
However, as in the enlarged GdF-Suez, the mother group will continue to hold the reins at Suez Environnement, controlling strategic decisions, appointments and financing. Even Suez Environnement’s option plans will be paid in the parent group’s shares, for the time being at least.
A pact will lock in GdF-Suez’s 35 per cent stake and 12 per cent held by Suez investors – including Belgian billionaire Albert Frère – for three years.
And Mr Frère shows signs he may even step up his investment in the water and waste company, suggesting that he has plans for the newly quoted group.
Far from balking at the iron grip Suez senior will continue to have, Mr Chaussade says it will give him “the best of both worlds ... We will have shareholders who share our vision of the long-term strategy. The market tends to be rather short term.”
But a quote will also “make sure that we’ll maintain a profitable growth strategy year after year,” he adds.
Mr Chaussade’s strategy is to return organic sales growth of 5 per cent a year between 2007 and 2010, with another 2 per cent expected to come from small acquisitions, mainly in Europe and North America.
Although such a figure is likely to be a little below the growth expected for rival Veolia, Mr Chaussade argues that the group’s focus on cautious investment in countries that are stable politically will be appreciated by the market.
“The balance between growth and acquisitions is a complex, subtle one,” he says. “What limits us is finding profitable acquisitions under acceptable financial conditions. That is the real question.”
Nor has he forgotten the group’s unhappy and costly experience in Latin America just a few years ago. So Suez will refrain from long-term investments in less stable markets where it will still seek business through management contracts.
Today, about 46 per cent of the group’s sales come from waste treatment in Europe; 32 per cent from water; and just 22 per cent from international activities. “Our portfolio won’t change very much,” he says.
According to analysts, Suez Environnement is likely to be valued at between €10.2bn and €12bn when it starts trading on July 22.
In its favour, Suez will be less indebted and offer more medium-term visibility than Veolia. The Frère factor will no doubt offer an added spice to the shares.
However, even Mr Chaussade does not pretend that the future is without its challenges.
Analysts expect margins to come under pressure if Suez steps up its investment in recycling, for example, which Mr Chaussade shows a ready willingness to consider given the market opportunity.
“The simple fact that raw material prices continue to rise will oblige us to recycle more,” he says.
“A circular economy based on recycling is one solution for a sustainable economy.”
Moreover, though Suez is Europe’s number one in waste treatment and second in water, the market could become increasingly competitive as rivals spot the opportunities provided by growing regulation and steady revenues.
“France can be proud to have two world champions, but others will emerge,” Mr Chaussade says.
“These are growing markets and other companies will want to come in.”
...............................................................
Special dividend to woo investors
Suez and GdF will greet shareholders, as they gather on Wednesday to vote on the €90bn ($143bn) merger of their companies, with the gift of an earlier than expected special dividend.
The merged group, which is expected to begin trading on July 22 assuming shareholders give the go-ahead, will pay out about €1.8bn to investors, or €0.80 a share. The French government, as the biggest single shareholder with 35.6 per cent, will get a total windfall of €640m.
The payment has long been trailed by Suez and GdF management, an inducement to investors to approve a controversial deal that has been two and half years in the making.
Merging the two groups will create an energy giant with annual sales of €75bn and strong ambitions to tap into the global revival in nuclear energy. Gérard Mestrallet, chairman of Suez who will hold the same post in GdF-Suez, has said he wants to tender for France’s second, new generation nuclear power station, recently announced by President Nicolas Sarkozy.
Copyright The Financial Times Limited 2008