Bloomberg News

Bordeaux Water Squeeze May Be End of Era for Veolia, Suez

July 30, 2012

Water Squeeze in Petrus Country Cuts Profits at France’s Suez

The incumbent Lyonnaise des Eaux, a unit of Suez Environnement, which reports half-year results tomorrow, will be forced to lower water treatment costs 30 percent and the typical annual household bill by 6 percent from 451 euros over the term of the contract, according to Bordeaux Urban Community. Photographer: Fabrice Dimier/Bloomberg

Bordeaux, the French city known for $3,000 bottles of wine, is obsessed with the price of tap water.

Municipal plans to lower household bills and take control of Bordeaux’s water and waste treatment facilities will shrink domestic profits that are already declining for Veolia Environnement SA (VIE) and Suez Environnement (SEV), the world’s biggest water companies. Dimmer prospects in the 5 billion-euro ($6.13 billion) French market signal the end of an era that gave the Paris-based utilities the financial muscle to expand abroad.

“The large water companies have understood that we are entering a new phase,” Jean-Pierre Turon, vice president of water at the Bordeaux Urban Community, which represents 27 municipalities said in an interview. “They can no longer take for granted big profits and complete control over operations that they enjoyed in the past. Water is a special kind of consumer good, not like other merchandise.”

Bordeaux follows Paris and Nantes in taking back control of water supplies as politicians including newly elected president, Francois Hollande, try to cut household bills. Contract renewals on tougher terms are costing water suppliers as much as 80 percent of their profit margins, according to Veolia Vice President for Finance Pierre-Francois Riolacci.

Bordeaux, center of the largest fine wine-growing area in France with about 10,000 producing properties, this month published preliminary results of bids for a six-year sewage contract. Four companies competed. Turon said the winner “scraped through.”

Earnings Tomorrow

As a result, the incumbent Lyonnaise des Eaux, a unit of Suez Environnement, which reports half-year results tomorrow, will be forced to lower water treatment costs 30 percent and the typical annual household bill by 6 percent from 451 euros over the term of the contract, according to Bordeaux Urban Community.

The utilities’ earnings this year have also been crimped by the economic slowdown in Europe as cuts in factory output, leaving less waste for treatment. Veolia and Suez shares havefallen 16 percent and 14 percent respectively in the last three months, making them the worst performers in the 17-member Bloomberg World Water Index, down 3 percent in the same period.

Unwinding Deals

Lyonnaise des Eaux has managed Bordeaux’s water treatment for two decades and will continue to operate six sewage plants serving 239,000 people under the new mandate until January 2019, when the municipalities take over the business.

For Bordeaux, the deal marks an important step to unwind 20- and 30-year water treatment and distribution deals in which Lyonnaise des Eaux enjoyed “too comfortable profits,” Turon said. In 2006 and 2008, agreed to lower rates and invest 280 million to compensate for past profits, he said.

“French water margins are being squeezed, there is big pressure on tariffs,” said Yohann Terry, an analyst at Exane BNP Paribas. “We aren’t yet seeing the end of the tunnel.”

Under Socialist Mayor Bertrand Delanoe, Paris took the city’s water distribution out of private hands in 2010. Suez Environnement and Veolia controlled water distribution on opposite sides of the Seine River that divides the capital. Veolia had been supplying water to Parisians since 1860.

After Veolia was spun off from Vivendi SA in 2002, former Chief Executive Officer Henri Proglio went on a 4 billion-euro acquisition spree starting in 2006 to expand the utility’s water, trash collection, transport and energy businesses to span 77 countries.

Asset Disposals

That growth turned into writedowns and asset sales after Proglio was replaced as CEO in 2009 by Antoine Frerot. The utility will operate in fewer than 40 countries by the end of next year, Frerot has said. The Paris-based company, which reports half-year results on Aug. 2, has announced over the past month the sale of its U.K. regulated water, U.S. waste- management and Baltic waste businesses.

Suez Environnement, created in 1880 to supply water to Lyon, followed Veolia in expanding abroad. It gained control of Spain’s largest non-state water supplier Sociedad General de Aguas de Barcelona SA, or Agbar, in 2010, making that country its second-biggest water revenue source after France.

The company issued a profit warning on higher costs at an Australian desalination plant and an outlook for flat 2012 earnings rather than previously forecast growth.

‘Made Crazy Amounts’

The utilities, which make as much as 40 percent of revenue in France, have been accused by politicians of using profits at home to finance expansion abroad.

“They made crazy amounts of money, double-digit profit margins,” Evelyne Didier, a Communist senator and vice president of the waste study group in France’s upper house of parliament. “It’s important that this be controlled. Thirty- year contracts need to be scrutinized.”

Water prices are coming down in some communities.

“Municipalities are preoccupied with the price of water.” Philippe Maillard, head of Lyonnaise des Eaux, said by telephone yesterday. “ They are trying to lower rates or keep rises as low as possible. They are asking for more control, transparency on prices and different development models. The market is changing, the clients are changing.”

For towns that have chosen to take over water services, some have contracted out billing or leak repairs to the private sector, he said.

Contract Erosion

Veolia’s margins are shrinking in the French water business due to “contractual erosion,” finance chief Riolacci said in May. In the last 18 months, the company has seen renewals cut profit margins by as much as 80 percent, he said on a conference call.

An official declined to comment further yesterday.

The utility agreed to reduce water prices on a 3 billion- euro deal signed in 2010 to supply water in suburban Paris for 12 years. That contract is the largest in France. Suez Environnement has reported an average 12 percent drop in tariffs for water contract renewals in 2010 and 2011.

A U.S. deal signed by Veolia in April may point the way for future French contracts, according to Bloomberg New Energy Finance. The company won a New York City contract where revenue from efficiency savings made by its water division would be split between the utility and the city.

“Veolia is seeing a loss of Ebitda in France this year while Suez has managed to keep earnings flat due to a more efficient cost-cutting plan and market share gains,” Exane BNP’s Terry said. “We remain cautious.”

Declining Use

French water use has steadily declined since 2006, while prices have risen since 1994. From 1995 to 1998, the price increases were 3.7 percent to 8 percent a year compared with about 3 percent from 2008 to 2010, industry group FP2E said.

Bordeaux has to decide in the coming months on investing in new sources of water. Nearby deep aquifers are over-used, leaving the wine industry capital no choice except to seek more distant reservoirs or turn to the Garonne River. The waterway was key to the 12th century start of trading of barrels of claret from the region to England.

Today, London wine merchant Berry Brothers & Rudd lists a 2003 bottle of Petrus, often the region’s most expensive wine, at 1,925 pounds ($3,000).

“We can’t forget that to have wine, one needs water,” Turon said. “In this new water era, there will be work for everyone, it just won’t be managed in the same way.”

To contact the reporter on this story: Tara Patel in Paris at tpatel2@bloomberg.net

To contact the editor responsible for this story: Will Kennedy at wkennedy3@bloomberg.net


Best LBO Ever
LIMITED-TIME OFFER SUBSCRIBE NOW
 
blog comments powered by Disqus