In February 2003, European utilities giant
Suez SA
named Gérard Lamarche its CFO, senior executive vice president and
point man in the execution of an extreme makeover. Lamarche had spent
the previous three years in Naperville, Ill., running financial and
administrative matters at an American water treatment subsidiary. He
returned to the Paris headquarters of an old-line conglomerate in need
of radical restructuring.
Suez was badly shaken. The company had mounted a heady acquisition
drive in the late 1990s. By 2002, however, it was staggering with debt;
in France, only France Télécom SA had more. Lenders were nervous, and the credit rating had been downgraded.
Investors had turned. Belgian billionaire Albert Frère, the
company's vice chairman and single biggest shareholder, was demanding
action. The previous CFO had been forced out, and CEO Gérard Mestrallet
was under great pressure. "When I took up my position," Lamarche says,
"everyone was very agitated."
One month before Lamarche's appointment, the Suez board had approved
a broad-based plan to slash debt, prune capital expenditures, reduce
exposure in developing countries and boost profitability. The board
signed off on financial targets and a timeline but left the actual
mechanics vague. Lamarche was charged with making it happen. Through
2003 and into this year, Lamarche juggled multiple negotiations with
potential buyers and employed numerous investment bank advisers. He
oversaw auctions, debt recaps and an IPO. He executed more than a dozen
deals, shedding some €12 billion ($14.7 billion) of assets and reducing
debt by almost half. "They really exceeded all forecasts," says Luc
Averous, a London-based analyst with Lehman Brothers Inc.
Divesting doesn't come easily to most companies. The scale,
complexity and urgency of the task at Suez made Lamarche's job all the
harder - and his achievement all the more noteworthy. "They put quite a
lot of thought into what they got rid of," says Matthew Barker, water
and wastewater program manager for research firm Frost & Sullivan
Ltd. If anything, the program was too aggressive, charge some critics,
who believe Suez cut too much, too quickly, failing to get top price
and damaging its environmental division core.
But everyone agrees Suez is in far better financial shape now than
it was two years back. An official blessing came in early June, when
Standard & Poor's Ratings Services upgraded the outlook on Suez to
stable from negative. "The rating actions reflect Suez's impressive
reduction of net debt," S&P credit analyst Peter Kernan says.
That Suez needed to shed fat was no secret. "They had to," Barker
says. Its history as a classic European holding company - rife with
interlocking assets, finances and directorships - meant that
simplification was in order as well. Predecessor company Cie.
Financière de Suez started out underwriting the Suez Canal, then
diversified into banking, insurance and investments. In the late 1980s
and early 1990s, it had undergone a similar cycle of acquisitions and
selloffs.
Cie. de Suez was the largest shareholder in European water and power
utility Lyonnaise des Eaux. In 1997 Mestrallet led a merger of the two
and embarked on a series of acquisitions. Suez emerged as the world's
second-largest water concern behind compatriot Vivendi SA. Suez also became a global energy provider, with side bets in media and telecom.
Debt, however, ballooned. When the go-go years ended, Suez couldn't
support its holdings. "We had no choice but to sell," Lamarche says.
"At the same time, we didn't want to make a fire sale. The screening of
the portfolio was extremely important."
Lamarche approached this task as a kind of insider-outsider. Now 42,
he spent seven years with Belgian industrial and financial holding
company Société Générale de Belgique. In 1995 he became special
projects adviser to Cie. de Suez, which held a major stake in Société
Générale. He assisted on the 1997 Suez-Lyonnaise merger and afterward
did a stint as senior vice president for planning, control and accounts
management of the new group.
No stranger to headquarters, he had also gotten some distance from it. Suez had purchased water treatment chemicals company Nalco
for $4.1 billion in cash and $400 million in assumed debt in November
1999. Eight months later, Lamarche moved to Illinois to oversee all
finance and support functions.
When Lamarche returned to Paris, he reported to a CEO facing a major
change of course. But unlike Vivendi's Jean-Marie Messier, Mestrallet
was willing to embrace changes. Lamarche assembled an in-house team of
about 15, including lawyers and corporate finance specialists, and got
to work on the action plan.
Divestitures ranged from office buildings in Belgium to a television
station in France. They fall into two general categories: noncore
assets and those whose returns fall below acceptable thresholds. Suez
also wants to pare assets in developing countries.
| What a difference a year makes |
| As divestments went up, debt came down |
|
Date |
Restructuring transactions |
Transaction value (€mill.) |
Total debt (€bill.) |
|
6/30/02 |
|
|
€28.2 |
|
12/31/02 |
|
|
26.0 |
|
2/28/03 |
Listed securities sale |
€1,100 |
|
|
4/24/03 |
Fortis shares sale |
1,800 |
|
|
5/16/03 |
Sale of 75% of British water utility, Northumbrian |
3,100 |
|
| Debt deconsolidation |
1,800 |
|
| Cash sale to pension fund consortium |
1,300 |
|
| IPO |
|
|
|
5/27/03 |
Syndicated loan |
2,500 |
|
|
6/5/04 |
Bond issue |
3,000 |
|
|
6/30/03 |
|
|
20.3 |
|
11/4/03 |
Sale of U.S. specialized chemicals subsidiary, Nalco to consortium of Apollo Management LP, Goldman Sachs Capital Partners and Blackstone Group LP |
3,600 |
|
| Sale of Spanish wastewater company, Cespa |
619 |
|
|
1/16/04 |
Sale of 29.2% stake in French television station, M6 |
1,000 |
|
|
11/31/03 |
|
|
15.0 |
|
2/28/04 |
|
|
13.9 |
|
4/14/04 |
Syndicated loan (retires 5/27/03 loan) |
4,000 |
|
|
6/04 |
Pending sale of French cable operator Noos to Mediaréseaux, French subsidiary of John Malone's UnitedGlobalCom Inc., for 7.25 times 2004 Ebitda. Will own maximum 20% stake in Mediaréseaux |
660 (max.) |
|
|
|
Lamarche began by unloading a €1.1 billion portfolio of listed
securities, a quick sale to reassure creditors. "We called a couple of
banks to line them up and said: 'Here is the transaction we want to do.
Please give us a bid an hour from now. We will select the best one.' "
Lamarche was off and running. Three subsequent deals stand out: the
sale of 75% of the U.K.'s Northumbrian Water Group plc; the sale of
Lamarche's U.S. chemical company, Nalco; and the sale of French cable
operator Noos.
Lyonnaise des Eaux acquired Northumbrian in 1996. Four years later,
British regulators cut tariffs. They also mandated that Northumbrian
spend £1.5 billion ($2.75 billion) in a five-year capital investment
plan. The result, Suez determined, was that the allowed maximum return
on capital employed dropped from 10% to 6.5%.
A straight sale to a strategic buyer was out, also for regulatory
reasons. "The synergies that could have been created would have to have
been given back to the consumer through tariff cuts," Lamarche says.
"Nobody was interested in doing this kind of heavy lifting for
nothing."
Instead, Lamarche settled on a risky three-pronged
strategy. "It was quite a smart move," Frost & Sullivan's Barker
says. Morgan Stanley served as financial adviser. In May 2003 Suez
transferred €1.8 billion in debt from the parent to the Northumbrian
unit. Suez then auctioned 75% of Northumbrian to a consortium of 20
pension funds. This allowed Suez to pocket €1.3 billion in cash but
remain Northumbrian's lead shareholder with 25%. An IPO on London's
Alternative Investment Market followed. After completion, Lamarche
says, he told his team, "Guys, we are going to make it."
Lamarche next turned to Nalco, which he termed "a fantastic company
[but] very cyclical. We were not anticipating a significant turnaround
in the coming months."
With antitrust issues hobbling potential strategic buyer General
Electric Co., and strong interest in the private equity world, an
auction was the logical course here. Lamarche invited a limited number
of PE firms, notably Apollo Management LP, Blackstone Group LP and Kohlberg Kravis Roberts & Co.
He demanded that each bid on its own; no syndicates were allowed.
"Until they were finished [with the bidding], they were competing and
fighting against each other."
Apollo entered the winning bid. Lamarche then opened the process to
the possibility of an investment consortium, and Blackstone and GS Capital Partners
joined Apollo. Eager to grab as big a stake as possible, the trio
approached Lamarche three days after the bids were finalized to buy the
20% Suez was originally going to keep. Lamarche agreed - and got a
slight premium.
In the sale, Suez got $4.2 billion, or 8.2 times Ebitda. That was
$100 million more than Suez paid for Nalco, although it was forced to
take a write-off because of the dollar's weakness against the euro.
Suez cut its total debt by €3.7 billion.
UBS was financial adviser on that deal, but then-Suez board member
Felix Rohatyn played an important advisory role as well. "It was very
important to have Felix because he has all the connections, he knew all
these people," Lamarche says. "It was useful to have a big brother like
that."
The latest deal involves the French cable operator Noos,
which boasts the largest market share in Paris and offers both pay
television and Internet access. Several factors pointed to a sale,
Lamarche says. Noos is relatively small, it isn't core, and it requires
more capital and managerial attention than Suez was willing to give.
The problem with a sale was lack of interest, Lamarche says. "It was
completely dry."
In February, media tycoon John Malone "knocked at the door and
offered to enter into negotiations with us," Lamarche explains. One
month later, Suez agreed to sell Noos to Malone's French holding
company, Mediaréseaux, which will pay 7.25 times 2004 Ebitda, capped at
a maximum price of €660 million. The deal is expected to close in late
June, leaving Suez with a stake in Mediaréseaux "below 20%."
With this last deal, "We are done with what we have designed,"
Lamarche says with satisfaction. "But you have to keep an eye on your
assets all the time. You can never end this process." He wants to
strike a balance. Late last year, Belgian subsidiary Electrabel SA
purchased for an undisclosed amount 22.22% of Cie. Nationale du Rhône,
a French hydroelectricity producer. That brings the Suez stake to 49%.
"It is a very important strategic move," Lamarche believes.
Speculation now centers on Electrabel itself. Suez owns 50.1%. In
May, some European newspapers suggested Suez was gearing up to purchase
the remaining Electrabel stake. That would entail a multibillion-euro
outlay. In subsequent interviews, Mestrallet, who Barker believes has
done a good job of "rebuilding his credibility," vigorously denied the
suggestion that acquisitive days are once more here at Suez. - Matt Miller
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