GERARD MESTRALLET is a man who knows how to say “non”. The chief executive of French utility giant Suez, formerly Suez Lyonnaise des Eaux, could easily have been sidetracked into the entertainment business, energy trading or IT — all of which were once promising prodigious returns.
When Enron was at its 1990s peak, investment bankers and management consultants were constantly urging Mestrallet to follow Enron’s lead, and boost Suez’s price-to-earnings ratio by ditching electricity generation assets and becoming a pure energy trader.
Others urged Mestrallet to follow Jean-Marie Messier into the more glamourous world of media and the internet, where Suez already had a smallish presence through its ownership of TV station M6 and the cable station Paris Premiere.
To his credit, Mestrallet resisted the temptation. He stuck to his knitting providing energy, water and waste management to businesses and consumers in 130 countries. By doing so, Mestrallet has given Suez an enduring future, enabling it to cast off its mantle as a defensive play and become a growth stock.
Mestrallet said: “A lot of consultants and bankers were pushing us hard, explaining that Enron was able to fuel its growth by decreasing the hard assets and strongly developing the trading business, probably by round-trip sales. They said that Enron was the model, as it had imaginative products and services, used the internet everywhere and was organising exchange platforms for everything.
“We heard the advice, we studied the case but decided to keep our own business model. This is based on real assets, real electricity. It may seem a little old-fashioned but we concluded it was the right one.”
Today Paris-headquartered Suez is one of the world’s leading multi-utilities, with annual sales of £25 billion, net income of £735m and a market capitalisation of £19.5bn. It has 190,000 employees in 130 countries.
Only two companies headquartered in France have higher ratings from Standard and Poor’s: food group Danone and drug firm Aventis (formerly Rhone Poulenc).
Suez started out as the Compagnie Universelle du Canal Maritime de Suez in 1859. By building the Suez canal, it opened up a new link between East and West, eliminating the need for cargo ships to sail around the treacherous Cape of Good Hope.
When President Nasser nationalised its principal asset in 1955, the company had some serious thinking to do — something Mestrallet, who took over as chief executive in the early 1990s, was also forced to do in the wake of the early 1990s banking crisis.
In the 1950s Suez transformed itself into a diversified holding company with a significant presence in the banking sector through its ownership of Banque Indosuez and domestic players such as Banque Sofinco and insurer La Henin.
But that strategy was in tatters by the time Mestrallet took the helm in 1995, with several banking subsidiaries in peril because of heavy exposure to property loans that had turned sour.
Mestrallet said: “That was a very difficult time, especially with Indosuez being close to bankruptcy and the future of Suez absolutely uncertain.”
Mestrallet, who earned his stripes by turning around Suez’s troubled Societe Generale de Belgique (SGB) subsidiary, shocked his colleagues by admitting he was not averse to a break-up of the group.
“I did not draw the line at selling anything. Options included merging with a bank, merging with an insurance company, transforming the business into an industrial group by giving up financial services.”
Finding some solution for Banque Indosuez was paramount.
“We did a lot of work to assess whether it was possible to restore it to profitability, and I realised it was not. We recognised that, in the financial services sector, we had neither the assets or the size to be an active player in the European industry. Therefore I decided to sell the bank, which was a very difficult decision. It was part of our heritage and the image of Suez was totally linked with Banque Indosuez.”
In the end, the bank was sold to Credit Agricole in 1996, following a three-way private auction also involving BNP and Generale de Banque.
To fill the gap, Mestrallet decided to acquire a controlling stake in the Belgian energy company Tractebel, in which Suez had acquired a minority stake through its 1988 acquisition of SGB. Today, with seven nuclear power stations in Belgium, Tractebel is the leading electricity company in the Netherlands, Belgium and Luxembourg. It also has extensive trading and liquified natural gas businesses elsewhere in the world.
Mestrallet said: “In three months, Suez completely changed. At the start it was a troubled banking group. Three months later I had no bank, no real estate and I was in the controlling position of one of Europe’s biggest energy companies. It had become an industrial and was ready to merge with Lyonnaise des Eaux four months later.”
Mestrallet said the key reason Tractebel was acquired was: “because it was a business with a strong competitive position, a good team, and the capacity to develop abroad.”
This was before the European electricity market was liberalised, so Tractebel decided to look further afield into emerging markets with assistance from the Belgian company’s energy engineering division.
But with liberalisation well underway, what are Mestrallet’s ambitions for the UK? Last week Electricite de France snapped up Seeboard, the south of England power supplier for £1.4bn to add to its London Electricity and supply arm of Sweb assets. Is Mestrallet tempted to follow EDF’s lead?
Mestrallet said: “We are not looking to buy energy assets in the UK. We have a presence as a gas trader in the UK. We are one of the largest shareholders in the Interconnector — the big gas pipe from Becton-on-Sea to Zeebrugge. And we operate the gas hub in Zeebrugge, which is the largest gas terminal in continental Europe.” This is the largest entry point for natural gas in continental Europe.
In water, through its Ondeo subsididaries including Degremont and Nalco, Suez is the world’s number two company, behind Vivendi Environnement. Mesttrallet doesn’t rule out bolstering the presence Suez gained in the UK market with the £853m purchase of Northumbrian Water in December 1995.
Mestrallet said: “We have not decided, for the moment, not to acquire more water businesses in the UK. The decision taken by Ofwat [the UK water industry regulator] two years ago to reduce prices has reduced the profitability of our UK businesses and therefore, if we buy another water company, there will have to be synergies with Northumbrian, our main water subsidiary in the UK.”
“I don’t say never but its not a priority to develop in the UK. The rest of Europe is an interesting market. Spain and Italy for example.”
Suez is also targeting large-scale water projects in emerging markets including Latin America and Asia. For example, it provides drinking water to 6.5m people in Manila in the Philippines, 4.5m in Jakarta, Indonesia and recently won a 50-year water waste-water concession in Shanghai, China.
Even though Suez is firmly in the private sector (it was nationalised by President Francois Mitterand in 1981 but reprivatised in 1987) Mestrallet does not believe that water assets should be in private hands. In emerging markets, in particular, he thinks they are better off being owned by municipalities.
“It’s much better that the public sector keeps the ownership of existing assets so that the finance the private sector can put on the table is concentrated on future investment. This can go towards extending the networks, constructing new plants and connecting new people to the network. At the end of the concession period, the assets should return to the municipality.”
For Suez, Mestrallet has set ambitious targets of double digit annual growth in turnover and earnings per share between now and 2004. “Our future growth will be driven by organic growth, although of course we shall continue to make some medium-sized or smaller acquisitions.
At the moment he is busy installing new systems to boost productivity. “I am convinced we can improve productivity, efficiency, customer relationship management, procurement and the information flow by using new technologies. We have, for example, an intranet connecting 60,000 people.”
He also believes that Suez must uphold strong ethical values if it is to have a sustainable future. “It’s a conviction. We are present in many different countries. And I believe we have to employ the highest standards wherever we are.”
To this end Mestrallet introduced an ethical charter for directors earlier this year, over and above the ethical code introduced in 1998. Mestrallet said: “The ethics charter was distributed to every member of the Suez group and I put in place a network of compliance officers.”
But surely, occasionally, it is tempting for a Suez operative to sweeten some local politician in parts of the world where such payments are de rigueur? Again, the Calvinistic Mestrallet says “non”.
“We would prefer to lose the contract. Such a practice would be revealed immediately and would immediately destroy our reputation. Our reputation is a competitive element of the business.
“When we’re in front of a mayor, a municipality, who is taking a decision to transfer their operations in water, waste, or energy to a multinational company, it’s a very difficult decision. They don’t know what will happen. But it helps that they have a long-term partner which has strong principles, who respects its commitments, and which also has the financial strength to live through temporary difficulties.”
Dumfries firm with hotline to Suez’s Paris HQ
Last year Suez strengthened its position in Scotland with the £10 million acquisition of Dumfries-based computer recyclers Frazier International. Frazier is expecting a surge in orders as it integrates with Suez’s Mirec arm.
Mestrallet said: “Frazier have good technology which is very complimentary to Mirec’s. It is certainly not excluded that parts of the European business will be managed from Dumfries.”
Suez is also active through Caledonian Environmental Services, set up by subsidiaries Northumbrian Water and Degremont. Caledonian has long-term concessions to build and operate waste water treatment plants for Scottish Water in Fife and Ayrshire.
Copyright SMG Sunday Newspapers 2002
This article was published in the Sunday Herald on 23 June 2002. Ian Fraser interviewed Gerard Mestrallet in the Suez head office in 16, rue de la Ville l’évêque, Paris, 8th arrondissement.