Veolia: A turnaround in water and waste

Cost-cutting and restructuring set the stage for a recovery at this global waste treatment firm.

By TheStockAdvisors Nov 8, 2012 1:47PM
Plastic Bottles copyright amanaimagesRF, amana images, Getty ImagesBy George Putnam, The Turnaround Letter

Veolia Environnement (VE) is based in Paris and traces its roots back to 1853; the firm provides environmental services to government and commercial customers around the globe.

Under a previous CEO, the company went on a debt-fueled acquisition binge in the mid-2000's. Then the 2008 recession hit many of Veolia's customers hard, forcing them to cut back their purchases of the company's services. Veolia has struggled to rebuild its revenues and profits ever since.

Veolia is refocusing its business to concentrate on a few core competencies in areas with strong growth prospects. It is divesting several non-core operations and using the proceeds to reduce debt. At the same time it is cutting costs and streamlining operations in the remaining business divisions.

The company is getting out of the transportation sector entirely, and is divesting its U.K. regulated water business and its U.S. solid waste operations.

It expects to receive proceeds of about 5 billion euros, much of which will be used to reduce the company's net debt load from nearly 15 billion euros to below 12 billion.

After the divestitures, Veolia will focus on water treatment, solid waste management and energy services. All of these services are likely to be in growing demand in both the developed and emerging economies. Management is reorganizing and streamlining operations. This is expected to save 225 million euros this year and 270 million in 2013.

Even as they laud Veolia's restructuring program many investors are shying away from Veolia because of its European location and focus. When Europe eventually comes back into investors' good graces, that could magnify the positive effect that the restructuring program is likely to have on the stock price.

In the meantime, Veolia is committed to maintaining a generous dividend. While European dividends can be more variable than in the U.S., and they may be subject to withholding taxes in some circumstances, it is likely that Veolia's dividend will add meaningfully to the total return in the stock.

We particularly like Veolia's strong position in the water treatment market because water is becoming an increasingly valuable resource around the world. And we believe that the actions currently being taken by the company position it well for the future.

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