The Scrap Over Suez May Shake France Inc.

Some of France's most powerful executives are mad as hell at Gerard Worms. They would like to grab control of the struggling financial-industrial conglomerate he runs--Compagnie de Suez--or at least eject him as its boss. Yet, seated in his 19th century Paris office, Worms merely shrugs. "When a sick company is three-quarters cured," he says, "it arouses appetites."

Maybe so. But the battle for Suez and its $122 billion in assets is not just a takeover fight for a proud old French company. This complex Gallic drama is likely to widen the chinks in France's tight-knit corporate system, opened in recent years by corruption scandals and foreign investors' demands for le corporate governance. And Suez' struggles may also hasten the demise of that archaic European institution, the bank as industrial shareholder. Like Credit Lyonnais and other European banks, Suez has lost heavily on industrial investments. So Suez might in the end be forced to spin off its bank from its portfolio holdings.

HARD CORES. France's nastiest corporate fight in years revolves around breaches in etiquette. Last winter, the country's second-largest bank, Banque Nationale de Paris, quietly amassed a 5% stake in Suez. That upset Worms, who began defensive merger talks without informing three outside directors whose companies control 25% of Suez votes. Those directors--the CEOs of insurer UAP, glassmaker Saint-Gobain, and oil giant Elf Aquitaine--were enraged when news of the talks leaked in June. Moreover, Worms's merger talks were with an "outsider": Franois Pinault, a retailer who succeeded without rising through France's elitist channels.

That's not the way things are supposed to work in France's cozy system of noyaux durs, or hard cores of friendly institutional shareholders. Now, Worms's three allies have joined BNP in attacking Suez. Worms has "no strategy," complained UAP Chairman Jacques Friedmann at a stormy Suez annual meeting on June 14. Friedmann wants to merge Suez with BNP and UAP, forming a European financial giant.

As for Worms, he has dropped his Pinault talks after an avalanche of criticism. He has also shelved--but not abandoned--a plan to merge Suez' industrial holdings with those of Belgium's Societe Generale de Belgique. SGB, 62%-owned by Suez, has stakes in banking, electricity, and other businesses.

Now, Worms has a third idea. On June 20 he announced talks with Lyonnaise des Eaux-Dumez, a French water and construction giant already 15%-owned by Suez. Its chairman, Jerome Monod, is a Worms ally. Worms's goal is an out-and-out merger, he told BUSINESS WEEK. "It is an old dream of mine," he says. He broached the idea with Monod a year ago but got a cold shoulder because of Suez' heavy losses. With Suez on the mend, Monod will talk.

Although analysts were scratching their heads to find sense in such a deal, Worms insists he could help finance and advise the French water company in its rapid global expansion. Sources say the cheery, low-key Worms would even let Monod become CEO of the company and accept the second slot himself.

CROWNING BLOW. Yet it's hard to see why Lyonnaise des Eaux, a successful company, would team up with such a weakened giant as Suez. A major error was its 1988 takeover of SGB, to save it from a raid by Italian financier Carlo de Benedetti. Although profitable, SGB generates subpar returns on equity, and Suez' stake is now worth less than the $2.5 billion paid for it. Another takeover--insurer Groupe Victoire--also turned out badly, because Suez overpaid. Worms sold it to UAP last year at a loss.

The crowning blow was a plunge by Indosuez and another Suez bank into Paris real estate lending--at the 1988-89 market peak. Suez wrote off $1.5 billion in bad loans last January and is now the reluctant owner of $1.2 billion in white-elephant office buildings. Worms admits more write-offs are possible if property values don't firm. Insiders say Worms warned Banque Indosuez executives in June that they need more capital. Standard & Poor's Corp. cut the bank's credit rating in May. Indosuez still has expertise in trading and the financial markets. But for a shrinking bank, "it's hard to compete in derivatives and big debt deals in a world of giants," says one Suez executive.

Many critics blame Worms for Suez' troubles. The chief executive of an SGB subsidiary calls Worms "intelligent and cultivated" but lacking management experience. A product of elite schools, he worked for government ministries and publisher Hachette and chemical company Rhone-Poulenc before joining Suez in 1984. "He does not know how to make money," says the CEO. "He should go."In Worms's defense, it should be stated that Suez' major mistakes were made by former Chairman Renaud de La Genire, who stepped down in 1990. "Worms inherited a lot of his problems," concedes Andrew Clearfield, a European portfolio manager for U.S. teacher pension fund TIAA-CREF, which is an unhappy Suez shareholder. And the chairman has sold $4 billion in assets, including insurance companies, shopping centers, and a stake in Belgium's Union Minire. Debt is down from a peak of $2.4 billion to almost zero. Worms says Suez is rebounding.

But beyond this financial reshaping, Worms has achieved little. Take his efforts to turn Suez into a hands-on corporate partner. Last fall, French hotel group Accor rebuffed Worms's plan to increase Suez' stake from 12% to 20%. "Suez wanted to name our next chairman," complains Gerard Pelisson, co-chairman of Accor. "We want a chairman who has the company's backing." Similarly, some executives of Suez' Belgian holdings complain of "arrogance" at Paris headquarters.

Worms is on much better terms with Monod of Lyonnaise, whom he sees as a savior. Suez insiders are trying hard to talk up the merger. "Lyonnaise is in services, and so are we," says one official. "They're in water, we built the Suez Canal." It will take more synergies than that to sell Worms's plan to the markets--and to satisfy investors' aroused appetites.

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