Agbar slims down ahead of de-listing

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The Agbar ownership saga has reached a predictable conclusion, with Suez Environnement agreeing to take a 75% stake in the Spanish operator. The financial benefits are mixed.

The announcement on 22 October that Suez Environnement and Criteria CaixaCorp had agreed terms for the French multinational to take majority control of Aguas de Barcelona came as little surprise to analysts and observers of the Spanish water sector.

Earlier this year, Criteria’s parent company la Caixa indicated its intention to reduce its industrial shareholdings and concentrate on the banking and insurance sectors. The acquisition of 100% of Adeslas in return for a partial withdrawal from Agbar therefore makes sense from la Caixa’s perspective.

Suez Environnement, for its part, has been open about wanting to increase its shareholding in Agbar, as well as expanding its activities in general in Spain – already its second most important market after France. Its long-running battle to get access to the board of Aguas de Valencia is testament to that.

The deal involves Agbar launching a bid to buy up the 10% of its shares which are still in free float at €20 per share ahead of a de-listing in the new year. At the same time, Suez Environnement will buy Criteria’s direct holding in Agbar at €20/ share, as well as a portion of Criteria’s 49% stake in Hisusa, the joint holding company (see chart opposite).

The deal will leave Suez Environnement with a 75% stake in Agbar (through Hisusa), allowing full fiscal consolidation from the middle of 2010, while Criteria will be left with an indirect holding of up to 25% in Agbar, depending on the success of the de-listing tender offer. At the same time, Agbar will divest its majority holding in healthcare company Adeslas, allowing it to become a pure water and environment player.

According to Santander, Agbar’s EGM to approve the bid will be held in the second week of December, and the next stage should be approval of the bid by the stock market regulator CNMV, a process which should be concluded by the end of January.

Santander does not think the CNMV will raise any objections to the price offered for buying out the free float. Domestically, however, things could be a bit trickier from a competition perspective, as Suez Environnement has a stake in Aguas de Valencia, which represents 12% of the liberalised water market in Spain on top of the 50% which is controlled by Agbar. If the regulators raise objections, Santander predicts that the French company will simply sell off its stake in Aguas de Valencia.

The deal is also likely to have been scrutinised by the Catalan government because of the implications of foreign ownership of a company which largely controls the water distribution system in Catalunya.

A spokesman for the Catalan president told GWI that the future of Agbar is “entirely a matter for the two private companies involved.” However, a source in one of Spain’s largest financial institutions told GWI that while “Criteria’s continuing stake in Agbar will not provide a veto power, it does give cover for the Catalan government. It is a political requirement because Agbar is the owner of the water infrastructure in the capital city of Barcelona,” he added.

While the deal will give a significant boost to Suez Environnement’s EBITDA margin (120 basis points based on pro-forma figures for 2008, excluding synergies), it will also encumber the acquirer with an additional €1.2 billion of net debt. This will push the group’s net debt/EBITDA ratio well beyond the multiple of three times stated as a target earlier this year, though CFO Jean-Marc Boursier was at pains to reassure investors that this would be brought down to the target multiple within two years of the transaction being completed. He refused to be drawn on how this will be achieved, however.

The deal is expected to be free cashflow positive for Suez Environnement in year one owing to the capital gain on the sale of Adeslas, and although the implementation of operational synergies will result in a one-off €15 million cost, Boursier explained that 50% of the expected €20-30 million of synergies at the EBITDA level could be realised within a year of the deal going through.

The challenge now for Suez Environnement will be to streamline its activities so as to position the enlarged group for rapid growth once the market returns to form. Having increased its revenues on the water and environment side by an average of 9% between 2006 and 2008, Agbar has held up better than its future parent, growing segmental sales by 1.5% in the first half of 2009, against a 1.2% drop at Suez Environnement.