BY ROB COX AND GEORGE HAY

Water, water everywhere, nor any drop to drink. That, to borrow from Coleridge, sums up Amber Capital’s analysis of French utility Suez’s approach to capital. The 8 billion euro operator of water and waste-treatment facilities around the globe is a juicy target for the activist investor. What’s less obvious is how Amber’s suggestions will put the group, whose history includes the building of the eponymous Egyptian canal, back on track.

Amber aimed its divining rod ably in choosing Suez for its roughly $150 million bet. The company helmed by Bertrand Camus has been a stock-market laggard. Suez trades below the price at which it debuted on the bourse as a spinoff from the merger that created Engie, the energy group that’s now its largest shareholder. And it has woefully trailed rival Veolia Environnement, whose shares have returned over 100% to their owners over the past five years, including dividends, compared to under 20% at Suez.

The overriding reason, by Amber’s reckoning, has been an empire-building strategy guided by unambitious return targets. Over a decade of shopping, Suez’s capital base nearly doubled to almost 19 billion euros, resulting in a 27% increase in shares outstanding but with no growth in net income or in per-share earnings and dividends, says Amber. The result is a return on capital employed that’s no greater than Suez’s weighted average cost of capital.

Amber’s timing is propitious. Camus only became chief executive in May. By making its case more thoughtfully than aggressively, Amber presents itself as his ally in shifting strategy. It also gives Camus support in handling Jean-Louis Chaussade, his predecessor who against the angels of better corporate governance became chairman. Some nice words about Engie’s own turnaround in its letter should also buy Amber good will with Suez’s key shareholder.

Aiming for higher returns on capital, as Amber proposes, is easier said than done. But it should force Suez to divest weaker elements of its portfolio and turn management attention to businesses that can benefit most from operational improvements. If all else fails, Amber’s next letter can simply recycle the investment-banking pitchbooks arguing that Veolia, with a market cap of 13 billion euros, should absorb its cross-town laggard.

First published July 18, 2019

IMAGE: REUTERS/Christian Hartmann