The Hot Seat

4 February 2008 Jerôme Contamine

Bound by a crippling €17bn debt, many doubted Veolia Environnement would make it as an independent company in 2000. Eight years on, business is booming. CFO Jerôme Contamine tells Nigel Ash how he changed the firm's fortunes.

When Veolia Environnement was spun off from Vivendi in 2000, it may have been the world’s largest water company, but it was also burdened with large and poorly structured debt. Some analysts doubted it would survive as an independent company.

However, with its core water and waste businesses, Veolia did have one big thing going for it. Eight years on, environmental concerns are centre-stage and the company is cashing in with water, water treatment and waste and recycling contracts worldwide, not least in China.

Yet, as CFO Jerôme Contamine explains, it has not been plain sailing. "A lot of people thought we could not survive with such a high level of debt– some €17bn. We had a problem not only in terms of the debt itself, but also in its structure."


Reducing debt meant offloading businesses that Vivendi had acquired in a spending spree. This included selling US Filter for less than half its original $9bn purchase price as well as its stake in Spanish construction group FCC for $1.2bn. In 2004, Veolia announced that it was refocusing on its core environmental activities, and by the end of the year, it had cut its debt from €12.7bn to €10.5bn.

The secret, says Contamine, is the strength of Veolia’s customer base: "We benefit from long-term contracts of between ten and 15 years, which make our cashflow highly visible and predictable." As a result of sometimes innovative refinancing deals, including the first eurozone inflation linker in 2005 and a €2.6bn rights issue in June 2007, the group’s debt burden is now manageable.

Contamine explains: "Our cashflow has to be leveraged to maximise and optimise ROI. Our cost of debt before tax is around 5–3.5% after tax compared to an ROI of around 10%. The value creation is between these two figures; the less equity and the more debt, the higher the return – to the extent that you do not put the company at risk. A debt-to-Ebitda ratio of 3.5:4 puts us in the low range, I would say, and after the capital increase, this is adequate."

In September 2007, S&P raised Veolia’s rating to BBB+ and a month later the company went to the sterling market with a tightly priced, fixed-rate (150 basis points over gilts) 30-year bond for £500m, which was four times oversubscribed.

Coming on top of the successful rights issue, Contamine believes that this deal demonstrates investor confidence.


However, the journey has not been an easy one. Investor confidence was shaken in June 2006 when a press leak forced Veolia to reveal that it was seeking a merger with French construction and motorway concession company Vinci. Within three days of Veolia CEO Henri Proglio confirming the plan, which the Vinci board eventually rejected, the markets had knocked 15% off Veolia’s share price.

Investors saw Veolia’s pursuit of a construction company as inconsistent with its strategy of focusing on its core businesses of water and waste – described by the company itself as its ‘pearl string’. And the apparent mismanagement of the bid did nothing to reassure the market.

"In the past three or four years, we have increased the value of the business. In 2003, the share price was €17; they are now above €60."

Contamine accepts that the premature breaking of the news created difficulties, but he insists that the merger did make good business sense. Veolia and Vinci often work side-by-side on environmental projects, and there seemed to be a strong commercial logic in bringing them together.

This failed merger attempt came hot on the heels of another bid that the markets viewed as far more logical – an attempt to acquire the international environmental operations of Suez in a joint bid with Enel of Italy.

At the time, Suez was in the process of finalising a merger with Gaz de France, which was delayed by then French President Jacques Chirac but is now expected to go ahead under newly elected President Nicolas Sarkozy. Contamine does not discount the possibility that the merged company might wish to dispose of the Suez environmental businesses, in which case Veolia would be a leading bidder.

Many analysts believe that Veolia’s attempts on Suez and Vinci were designed to stave off the attentions of private equity investors. Was it Contamine’s view at the time that Veolia was then in play, and has the situation changed?

"Look, every company is a target," he replies. "We have to demonstrate to our shareholders that we are creating value based on a strong model. If we were owned by another shareholder, the company might have a very different strategy.

"In the past three or four years, we have increased the value of the business. In 2003, the share price was €17; they are now above €60. Total shareholder value from 2002 to 2006 has increased by 183%. We plan to continue improving our share price by growing our business. This, in my view, is the best defence against any takeover."


Following the successful €2.6bn rights issue in June 2007, Proglio said: "Veolia is now master of its own destiny," adding that an €8bn acquisition would not be a problem. Contamine says: "We have an investment target up to 2010 of €15–20bn. Of that, I would say at least €12bn will be invested in organic growth and €3–8bn in acquisitions.

"We benefit from long-term contracts of between ten and 15 years, which make our cashflow highly visible and predictable."

"We are looking at a lot of targets. Many are not well known because the waste sector still has a lot of medium-sized, possibly family-owned, companies, which are not always visible to players in the financial markets. We try to identify targets where we can be the most competitive bidder." A typical example is Veolia’s purchase of Italian waste incinerator TMT in May 2007.

Veolia’s strategy, Contamine maintains, is to grow organically, with an opportunistic view of acquisitions. Any target company would need to complement and accelerate growth in existing operations rather than just add income. Its September 2006 purchase of Cleanaway UK provided this kind of synergy, significantly boosting its presence in the UK waste management market.

The emerging jewel in Veolia’s crown is its China operations. Despite regulatory uncertainties and markedly lower margins than in Western Europe, the company expects to double its growth in China every two years, with water and waste treatment projects accounting for up to 4% of group revenues by 2010. Contamine points out that in most of the 20 current projects, all for between ten and 50 years, Veolia has an equity stake.

The past eight years may have been a rough ride for Veolia Environnement, but with its debt under control and burgeoning Chinese operations, it is proving its detractors wrong.