Will GE Water save Suez from impatient investors?

Published March 2nd, 2017

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Insight from Christopher Gasson, GWI publisher

This year’s results season has not been pretty for the major European water operators. Veolia saw its water revenues dip from €11.4 billion to €11.1 billion. Suez’s European water revenues edged down from €4.8 billion to €4.7 billion, and FCC Aqualia’s dropped 2.3% to €1.0 billion. Suez’s International division – which includes solid waste as well as water – did better, with revenue up from €4.0 billion to €4.3 billion. Acciona Agua was the star performer, with revenues steeply up from  €451 million to €708 million, largely as a result of a first full-year contribution from the ATLL concession in Catalunya.

Altogether, the results show just how far we are from seeing a solution to the lack of growth in the water operations sector. The tightness of the market is underscored by the fact that Acciona won the ATLL contract from Suez, and the latter is challenging the award in the courts: Acciona could yet lose the contract if the Supreme Court rules against it over the summer. There are no new large municipal contracts to make up for the steady pressure on existing ones when they come up for rebid, and new business models and digital offerings have yet to make up the difference.

The EPC (engineering, procurement and construction) side of the business has not been great, either. The work is out there, but all four companies are being judicious about what they bid for. Competition for projects has grown a lot faster than the market – particularly in the Middle East. For example, 18 companies have submitted statements of qualification for Dubai Electricity & Water Authority’s first desal project in nearly a decade.

The Spanish companies are in a much more fortunate position than the French. As relatively small subsidiaries of much larger groups with much bigger problems elsewhere, they look like star performers, and can easily attract investment from their corporate parents. Furthermore, they don’t have the entrenched corporate overheads that the French companies have to deal with when they need to change their offering. The French, on the other hand, don’t have bigger problems elsewhere which they can hide behind, while the pressure to cut costs makes the case for new investment more difficult.

My guess is that while the Spanish companies will enjoy 2017, the French will have to wait until at least 2018 before they can say they have truly returned to strong profitable growth on the municipal side of their businesses. In the meantime, the race is on for the industrial market. This offers greater scope for differentiated offerings that deliver good margins.

In this respect, Veolia – which has a larger industrial technologies portfolio than Suez – is better placed to thrive. Indeed it claims that 54% of the projects in its commercial pipeline are industrial projects.

Suez, meanwhile, either needs the patience of its investors or the acquisition of GE Water to make 2017 a comfortable year. CEO Jean-Louis Chaussade said he was interested in buying the American company at Suez’s results meeting yesterday. It would be transformational for the company. But the question is, will Suez put a value on the business that secures the asset? The problem is that half of GE Water is the Betz chemicals business (the other half is technologies and related services). The French company has already failed once in the chemicals business, having struggled to meaningfully integrate the market leader, Nalco, when it owned the company between 1999 and 2003.

Coincidentally, Nalco’s buyer back in 2003 was Blackstone, one of the private equity companies also now rumoured to be bidding for GE Water. We don’t know whether Goldman Sachs – which is brokering the deal – has the patience for a joint bid, but it would bring some happiness to Paris if it did.