Shakespeare’s Veolia

Aren’t utilities supposed to be boring? Surely, not even William Shakespeare could have made up such a fanciful tale as this.

Wouldn’t you have thought that running a water utility would be fairly straight forward? You turn on the tap and the water comes out, right? Not much has really changed in how that works in 100 years, right? Mostly they operate as monopoly businesses, right? Ok, if the pipes leak it costs a bit to mend them and if it doesn’t rain people aren’t happy, but compared to many industries the actual business is pretty simple and they often just have regulators to worry about, not competitors, or new technologies, or the disruption caused by internet dis-intermediation.  But no, with scale – most water utilities are on the big side – with scale comes power and give men power and they often behave badly. If this happens in a country so steeped in hereditary privilege, giving preferential access to the best schools and jobs, that it makes the UK look like a meritocracy, and a country where politicians just can’t help themselves from getting too involved in big business, well, then it can end up pretty messy.

I have been speculating of late, rather unrealistically it has to be said, about the need for CEO’s to leave when they are replaced, as has recently happened with Yahoo. It rather puts me in my place to read about the nonsense happening over the Channel in Veolia, the world’s biggest water utility by sales, where the replaced CEO not only stayed on the board – as well as being sent off to run state-controlled EDF, even after making a bit of a mess of Veolia – but he has now been trying to oust the guy who replaced him for trying to undo his hopelessly expansive and dilutive strategy. Not only that but there was talk of this being orchestrated in order to bring an ex-minister under Sarkozy, Mr Borloo, into run the business, which of course was denied. Well, it is France, but is that really enough of an excuse?

Veolia, France’s biggest private employer, is in a mess and the new guy in charge is trying to pull back from his predecessor’s colonisation of the known world and cut investment and borrowings to make the business, well, more like a utility business should be. He is even planning to sell Transdev, one of the worlds largest public transport groups, that with its trains and trams, in 27 different countries, has no place in a water utility anyway.

Mr Fréro saw off a boardroom putsch lead by his predecessor Henri Proglio in February, putting him under even more pressure to do something quickly when, in fact, this sort of muddle takes time to unravel.  He rebalanced the board in his favour, but now he is facing more and more bad news, which he rather charmingly points to as evidence that a “transformational strategy is necessary”. Fréro was once a protégé of Proglio and he was at his side when a lot of these unwise investments were originally made, so he is not without blame here too. One of the departing board members accused him of “abandoning the company’s global ambitions.” In reply Fréro said he was wrong and “to not change…would surely put an end to all of Veolia’s ambitions.”  So many utilities have done something similar but on a smaller scale and many made a mess of it too. Why don’t they learn? Easy really, they did it mostly at the same time, following each other like sheep, all unaware of the real risks.

Veolia’s sales rose by 1.6% to €14.8Bn in the fist half of the year compared to last year and net income was €153.1m compared with losses of €67m in the first half of 2011. If it were a publically owned utility it might be a good policy to make no money, but it’s not much fun for shareholders who normally turn to utilities for a steady stream of dividends and no surprises, not melodrama; it must be galling (or should that be gauling?) that so much of their dividends have just been wasted on fanciful business expansion in recent years.

It will be very interesting to see what President Hollande does with Proglio after all this public embarrassment, up till now Proglio’s famed political connections have been an asset, but I wonder just how secure his position at EDF is now?

 

Mark

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