Suez Environment confident in the shadow of Gaz de France merger

Suez Environment boss Jean-Louis Chaussade explains his long-term, low-risk vision to Christopher Gasson. It sounds good, but will it go down to friendly fire as the merger with GdF grinds ahead?

Jean-Louis Chaussade was appointed as CEO of Suez Environment during the executive blood-bath which followed the €750 million failure of Aguas Argentinas. Since then he has stabilised the business, but now, with the Gaz de France merger, he is facing a different kind of uncertainty.

Global Water Intelligence met him last month in Paris to discuss the outlook for the company. Chaussade joined Suez’s contracting subsidiary in 1978 as a young engineering graduate, and remained with the group, with time away to attend Harvard and the École des Sciences Politiques in Paris, until he was promoted from CEO of Degrémont to become CEO of Suez Environment in March 2005.

Older than his predecessor, Jacques Petry, and with a less pronounced Anglo-Saxon business agenda, Chaussade comes across as more than a safe pair of hands.

It is his measured determination which has brought the company back to health after a period of catastrophic losses, and his leadership is about maintaining the focus on steady growth in an industry which moves at a glacial pace, rather than big deals which make the headlines. As things stand, there is little pressure to change.

“The stock exchange wants us to combine reasonable growth with good profitability, and that is exactly what I am trying to do,” he explains. “To go at a much higher speed in my view means additional risk, additional acquisitions, probably at a high price because nothing is really cheap in the water world today, and therefore I am cautious but at the same time trying to achieve the highest possible growth.”

Much of his work in the past three years has focussed on taking the surprises out of the business. “There are no more significant risks in this company today. There is no business without some risk, but I should say that this business is now totally clean. There is no major risk which could eat the bottom line in a substantial manner today.”

The real surprises are likely to come from a different direction. Currently Suez Environment (including its solid waste activities) represents around 25% of Suez’s €41.5 billion revenues. With Gaz de France, this proportion will fall to 16%. Liberalisation of the European energy market could divert management attention and capital away from the investment needs of Suez Environment. Chaussade denies the merger will leave Suez Environment in a similar position to Thames Water, after its parent company discovered the opportunities in consolidating the European energy sector.

“Suez Environment has been part of Suez from the true beginning. Nobody bought us. RWE is two companies. They are very good companies but they are regulated companies, which require a huge level of capital employed. For these reasons, we are not in the same position. We are profitable.

“When you look at their cash position, they are always cash negative. I imagine how difficult it has been to deal with people from another country. We are not a regulated business. We have a lot of different types of business including some which are regulated, and at the end of the day our return on capital employed is good and we are cashflow positive before big acquisitions.”

On a strategic level, Chaussade disputes the logic of splitting Suez into two separate companies. “First of all we have shareholders, and I have a boss, and the decision is that Suez Environment is part of Suez. My personal point of view is that I think it is a very good thing for Suez Environment to be part of a big group, because it means that we share financing sometimes. We share risk. We share common networks, we share efficiencies. To be part of a big group is a big help.”

He disputes the suggestion that, since Suez Environment started reducing its capital exposure three years ago, access to capital has been less important. “I think that the reason why we decided to reduce our capital employed was to reduce the debt of the company, and also to manage the turnaround which was necessary in Suez Environment. It has nothing to do with future potential investment in the coming years.

“In future, if we have a significant acquisition, we can have access to the market. It is a great flexibility. If I was to raise €500 million alone, it would be much more difficult.”

Chaussade also points out that there is some joint purchasing of pipes and pumps, some shared contacts which are useful for both power and water, as well as growing cooperation between Suez Energy International and Degrémont in the Gulf. He cites the example of the Barka 2 independent power and water plant tender in Oman, in which a developer consortium led by Suez Energy International has been named preferred bidder, with Degrémont as EPC contractor for desalination.

“I am not saying that this is a huge synergy, but there is a synergy. To have additional synergies in a world where we have strong competitors is good. I do not see any advantage in being a stand-alone.”

Overall, he sees the Gaz de France merger as beneficial. “To have the French state in the shareholding would be an advantage, in France at least.” The big unanswered question is how Suez Environment’s customers around the world will respond to the thought that their water might be controlled by a foreign government.