Water, Water Everywhere
Terril Yue Jones
Forbes Magazine November 30, 1998
NEW YORK - PERRIER WATER IS FRENCH. And so is the water that comes out of the taps in such cities as Indianapolis, Gary, Milwaukee and San Antonio. And soon in Atlanta.
Right now only about 15% of American municipal water systems are privatized, but more and more towns want out of the capital-intensive business and are considering outsourcing to private companies.
Paris- based Suez Lyonnaise des Eaux brings big money to the table in bidding for the privatized waterworks. Grard Mestrallet, the 49-year-old chief executive of Suez Lyonnaise, says the company sees "great opportunity in the fragmented U.S. market."
There are nearly 60,000 municipal or private water companies in the U.S. -- ripe for privatizing or buying. Last year the Treasury Department changed tax policy to allow water management contracts to run for up to 20 years instead of only 5 -- making substantial investments in the business a safer bet.
Unlike in, say, electricity, there is no worry about regulatory agencies refusing to allow reasonable rates. The water rates are negotiated between the private company and the municipality. Suez does its water business in the U.S. in a 50-50 venture with United Water Resources, based in Harrington Park, N.J., of which it owns 28%. No other holder owns greater than 2%.
Suez Lyonnaise is going after the U.S. market mano a mano against another French company, Paris-based Vivendi. Suez beat out Vivendi's U.S. arm and several others for the hotly contested Atlanta contract in August. The contract will produce revenues of nearly $25 million a year for a minimum of ten years.
Vivendi operates through the Wakefield, Mass.-based Aqua Alliance. It owns 83% of Aqua, which trades on the American Stock Exchange. The global businesses of the two French companies dwarf such American water companies as American Water Works and California Water.
Suez had $500 million in U.S. water revenue alone last year, or 1.25% of the combined public and private market. Vivendi had $490 million in such places as Puerto Rico, Oklahoma City and Bridgeport, Conn. The U.S. market is just one target for these ambitious French outfits.
"We want to grow our water business globally," Mestrallet told FORBES.
The timing is right. While the developed nations are privatizing, developing countries desperately need potable water. China, for example, has been a market for Suez Lyonnaise since the late 1970s.
Mestrallet keeps picking up projects as China's needs for infrastructure and pollution treatment expand. Most recently, in September he signed two deals to build a $23 million water purification facility in Shanghai and a $28 million incineration plant in the Pudong Zone.
In Buenos Aires Suez Lyonnaise is building a $20 billion water and sewage network. In Casablanca, it supplies both water and electricity in a 30-year, $3 billion project. It has won water or sewage contracts in Manila, Budapest, Jakarta, La Paz and Potsdam. It is linking with Vivendi to jointly bid for the $1 billion water system privatization in Rio de Janeiro.
Suez Lyonnaise des Eaux was created only last year by merging two old-line French companies, Compagnie de Suez and Lyonnaise des Eaux. Suez, originally formed to build the Suez Canal, had grown into a financial and construction conglomerate; Lyonnaise was in water.
Mestrallet dumped a lot of real estate and miscellaneous assets and continues to slim down to focus on Suez Lyonnaise's four main businesses: water, energy supply, waste management and communications, mostly cable and satellite television. Through acquisitions and new contracts in water and waste, Mestrallet's ambitious goal is to double Suez Lyonnaise's water revenue by 2002. That would mean a $10 billion business.
He also promises to double total earnings per share, which were $5.50 last year. Wall Street loves what he's doing. Traded in Paris, Brussels, Luxembourg and Switzerland, the stock climbed to $189 by Nov. 6, from $113 at year-end 1997.
"As a value investor, they hit on almost everything we look for," says David Marcus of Franklin Mutual Advisers, Inc., which owns $640 million -- or about 3% -- of Suez Lyonnaise.
Now if only Mestrallet could make the water taste better.
