Veolia Shortsellers See Hurdles to CEO’s Reorganization

Veolia SA CEO Antoine Frerot
Veolia SA Chief Executive Officer Antoine Frerot. Photographer: Fabrice Dimier/Bloomberg

Investors are betting that Veolia Environnement SA’s stock, which hit a record low last week, will drop further, demonstrating uncertainty about whether its chief executive officer can turn around the French water utility.

The number of shares being shorted has more than tripled since hitting the lowest this year in February, according to data compiled by Markit, a London-based research firm. That makes Veolia the second-most shorted stock in the Stoxx Europe 600 Utilities Index, according to data compiled by Bloomberg.

“There are some very serious headwinds,” Louis Boujard, a utilities analyst at Banco BPI, said by telephone. CEO Antoine “Frerot is trying to do the restructuring that needs to be done. The question is whether he’s paddling fast enough against a declining economy.”

Frerot is one year into what he pledged would be a two-year “profound transformation” of the Paris-based utility. He plans to cut debt and costs, sell assets and scale back global operations to boost profits. The Veolia chief has also changed top management and shuffled the board.

The result so far is that Veolia shares slipped to 7.38 euros on Nov. 16 from 65.65 euros almost five years ago.

Veolia rose 1.3 percent today to 7.90 euros in Paris. The gain followed Veolia’s confirmation that the sale for $1.91 billion of the U.S. solid waste business sale won regulatory approval and would lower debt by around 1.44 billion euros ($1.9 billion).

Outstanding Shares

Short interest as a percentage of Veolia’s outstanding shares reached 7.4 percent on Nov. 16, up from a low of 2 percent in February, according to data compiled by Markit.

Veolia spokeswoman Sandrine Guendoul declined to comment on short interest in the company.

Italy’s Terna Rete Elettrica Nazionale SpA, which traded without the right to the latest dividend on Nov. 19, has the highest level of short-interest as a percentage of shares outstanding in the index at 9.8 percent. Austria’s Verbund AG is third-highest at 4.1 percent.

Two days ago Frerot named Francois Bertreau as chief operating officer, charged with “accelerating the company’s transformation” through cost-cutting and a reorganization.

Veolia’s management met last week with unions on a plan to shed about 100 jobs at the French headquarters, a fifth of the total, according to spokeswoman Marie-Claire Camus.

Slowing Economy

The challenge is the economy in France, which accounted for almost 40 percent of Veolia’s revenue last year, and has barely grown since the first quarter of 2011.

“Veolia is very sensitive to the macroeconomic environment,” Boujard said. “If that gets too bad, all the restructuring efforts will be put toward compensating for the economic decline.”

Frerot is working to roll back the legacy of former chief Henri Proglio, who resigned as chairman almost two years ago and as a director last month. Proglio spent about 4 billion euros on acquisitions in 2007-2008 amid an expansion that put the utility in 77 countries from Argentina to South Korea. Frerot has plans to reduce that reach to about 40 countries.

“The majority of Veolia’s operating inefficiency relates to the lack of integration of the multiple of acquisitions the group made over the 2006 to 2009 period,” Citigroup Inc. said in a Nov. 20 note.

The company plans to sell 5 billion euros of assets and cut investments this year and next. It has sold its U.K. regulated-water and U.S. waste-management businesses and plans to start buying back bonds by the end of the year.

Lower Production

Boosting earnings on businesses that the company will continue to operate will be difficult as European economies slow, according to analysts including Barclays. Lower industrial production has meant factory closures that reduced waste volumes handled by Veolia and rival Suez Environnement.

“Earnings momentum remains an issue given the weak macro economy,” Barclays analysts including Julie Arav and Peter Bisztyga wrote in a Nov. 20 note to investors.

This led Fitch Ratings to revise Veolia’s outlook to negative from stable on Nov. 15. The service said cash-flow generation and de-leveraging over the next year could be limited by a combination of weak economic conditions and “operational difficulties.”

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