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BARRON’S Online: Eau, Please: Investment firm jousts with Suez to boost values: “Knight Vinke made a name for itself as one of the investors that successfully urged a corporate makeover at Royal Dutch/Shell. But unlike the Anglo/Dutch oil giant, which still is feeling the repercussions of its misstated petroleum reserves, Suez isn't in crisis.” ( 20 Dec 04




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IT MAY LOOK ODD for little-known investment firm Knight Vinke Asset Management to be taking to task a company the size of Suez for failing to maximize shareholder value when, if anything, investors have become more bullish about the prospects of the streamlined Franco-Belgian utility.


Knight Vinke favors splitting the company in two, regrouping all Suez's energy assets -- power generation, transportation, and services -- in Electrabel, the Belgian utility in which it has a 50.8% stake, which would be spun off. That would leave Suez as a water and waste-management outfit.


Knight Vinke reckons that would attract higher valuations for both companies by eliminating Suez's conglomerate discount, leaving the company focused on its environmental-services business, underpinned by the cash-generating long-term contracts with French municipalities. Electrabel, no longer burdened by having to feed a cash-hungry parent, would become a pure-play international energy concern.


It has certainly energized shares of Electrabel, which rose more than 10% in the past week as already bullish investors banked on Suez buying out minority shareholders, or being swayed by Knight Vinke's view that the company isn't fully valued as is.


Knight Vinke is betting on rallying institutional investors to its cause because Suez's share price has fallen 45% in the past five years, compared with the benchmark CAC-40's decline of 31%. Knight Vinke hopes to get the ear of Belgian financier Albert Frere, Suez's biggest shareholder, who's grumbled in the past about the company's strategy.


The firm is backed by the California Public Employee's Retirement System, although the €200 million-€250 million it has invested in Suez and Electrabel makes the pension fund a small shareholder in the context of the two companies' market values of €19 billion and €18 billion, respectively.


Knight Vinke made a name for itself as one of the investors that successfully urged a corporate makeover at Royal Dutch/Shell. But unlike the Anglo/Dutch oil giant, which still is feeling the repercussions of its misstated petroleum reserves, Suez isn't in crisis. "We were going with the tide at Shell, whereas here we have the tide a bit against us, but the tide isn't so well-informed this time around," founder Eric Knight says.


In fact, Suez has been increasingly in investors' good graces as CEO Gerard Mestrallet pushes forward what appears to be a sensible two-pronged strategy, shorn of the distractions that had threatened to sink the corporation a few years ago. A spending spree saw Suez expand its water business rapidly in the late 1990s and early 2000s, while it was reluctant to sell non-core assets, ranging from banks to cable television, inherited from the 1997 merger of Compagnie de Suez and Lyonnaise des Eaux. That stretched Suez's finances. By late 2002, this panicked investors already shaken by worries about overall corporate creditworthiness, particularly in France where companies like Vivendi Universal, France Telecom and Alstom were in danger of going bust.


Suez reacted in the nick of time, changing its chief financial officer, selling assets, and cleaning up the balance sheet as it beat a hasty retreat from a number of unprofitable water contracts it had signed in cities in North and South America, and Asia.


Despite the mutterings about Suez's strategy, Mestrallet was able to announce his board's full support for management last spring. The market has given the company a vote of confidence, too, lifting Suez shares nearly 19% this year.


Knight is unimpressed. "The real priority has been debt restructuring...rather than maximizing shareholder value," he contends. He bemoans what he considers a lack of open debate about Suez's options, and the cost of the twists and turns that Suez has undergone in its efforts to find a strategic focus. Those maneuvers have included short-lived aspirations to build up a media division to match Suez's water and energy operations, abortive merger talks with E.On of Germany and Air Liquide of France, as well as the ill-fated international expansion of Suez's water business.


The weakness in Suez's approach is that it has dilly-dallied over taking full control of Electrabel, from which it receives only dividends, even though a boardroom reshuffle reinforced Suez's management control over the company this year. Furthermore, management has overestimated the synergies from offering municipalities and industrial customers "multiservice" contracts.


Whatever the intrinsic merits of Knight Vinke's plan for Suez, the firm might be underestimating the power of Suez management's close ties to France's political and business establishment, not to mention France's ideological attachment to "national champions." For now, Mestrallet is standing firm, telling investors last week that that as far as Suez's strategy is concerned, "the matter's been decided."


MATTHEW CURTIN is a reporter for Dow Jones Newswires in Paris.     


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