What does the Suez – GE Water deal mean?
Published March 9th, 2017
Suez needed this deal very badly. The share price has been drifting downwards since April 2015, primarily because margins on the traditional municipal outsourcing business are being squeezed more quickly than the company can develop its new business offerings. Buying GE Water, with its strong presence in industrial equipment and services, completely transforms that outlook. It gives the company immediate access to new markets and new business models that it can grow, over both the short and long term.
The markets were not initially impressed, marking the shares down 2% at one point this morning. By the time the market closed this afternoon, however, Suez shares were up 1% to €13.77.
My guess is that the markets are over-reacting. It is a steep price, but it is also a great asset. Furthermore, GE Water management seems pretty motivated by the outcome. I spoke to GE Water marketing director Ralph Exton and CEO Heiner Markhoff last night just as the deal was announced, and they were both pretty fired up about the result. I guess having a parent company that not only understands water but is absolutely excited about what GE Water can do is a huge relief. For the past fourteen years, the company has been ruled by an owner who has never been able to understand why water is not more profitable.
Despite the joy on both sides of the deal, there are some challenges ahead:
1) How can the decline of the chemicals business be reversed? This business appears to have been squeezed by competition in recent years. Historically there have not been many synergies between the chemicals and equipment side. Suez needs to show that it can grow the chemicals business – or sell it to someone who can.
2) Will there be channel conflict between GE Zenon and Suez? In theory the rest of Suez will treat Zenon as just another supplier, but in practice customers are likely to see it differently. Suez already owns one low-pressure membrane supplier, Aquasource, which has failed to generate significant third-party sales as a result of channel conflict. Can it afford another?
3) Will Suez need more capital to make the most of GE Water? In my view, the best bits of the GE portfolio are its cluster of owned and operated treatment plants and its mobile water business. I suspect that both businesses would be much bigger if GE had been more willing to invest. Suez’s own balance sheet is quite constrained, which might make it difficult to make the most of the acquisition.
4) Is it time for a yieldco? Suez now has one of the best portfolios of owned and operated assets in the water sector. This is significantly undervalued in Suez’s current share price. If the relevant assets were shifted into a yieldco, Suez could leverage them up and sell a stake in the business to investors who want low-risk, high-yielding assets. It would be the cheapest way of raising money to finance the growth of the business.
5) Will the French stay out of it? The GE Water management team is among the best in the business. Suez also has a strong management culture, but in a very different way. It is difficult to see how they can add value to what GE Water is already doing beyond supporting from a distance. One hopes that Suez can afford to strike the right balance between independence and delivering the promised synergies from the acquisition.
6) Is this Jean-Louis Chaussade’s swansong? The Suez CEO turned 65 in December. This acquisition would appear to seal his legacy at the company. Once the integration is complete, what is left to achieve?
There will be more answers and analysis – plus an interview with Suez CEO Jean-Louis Chaussade – in this month’s GWI, out next Thursday.