Resources 26
Multinational strategies

April 1998

For Générale des Eaux, 1998 will go down as the year the Group changed its name and formed a merger with Havas. At our next General Shareholders’ Meeting on May 15, you will be asked to vote on resolutions that will have a profound impact on the shape of Générale des Eaux for many years to come. The meeting will be transmitted live on the Internet – a "first" in France.

Before the meeting, however, I should like to comment briefly on our 1997 financial statements. Net income was FF5.4 billion, up 180% on 1996 and far in excess of our previous best performance. An even more significant item, in my view, is the rise in operating income to FF4.2 billion, up 42% on a like-to-like basis and at constant exchange rates and methods. This sum illustrates the impact of the restructuring of our divisions and the continuous efforts of our 200,000 employees. In the Utilities Division, there were particularly large increases in transport (+46%) and waste management (+21.5%), and significant growth in energy (+7%). The water sector, which continues to make the largest contribution, will benefit in 1998 from the new organization and procedures that have been put in place. In construction, SGE is returning to a profitable position. The property sector, meanwhile, appears to have put the worst years behind it and virtually reached break-even, with operating income generated by the housing activity. In the Communications Division, although Cegetel is in a phase of major capital investment, the mobile telephone business is approaching break-even. SFR made a loss of FF0.4 billion in 1997 compared with FF1.1 billion the previous year. The company’s performance would be better than break-even if it applied the less prudent depreciation methods used by some of its competitors.

The second important feature of the 1997 financial statements is that they confirm – whatever the criteria used – the rapid reduction in the level of debt. By the end of 1997, net debt on the balance sheet stood at FF27.5 billion, compared with FF52 billion two years ago. Total financings showed a similar reduction, falling to FF39 billion from FF65 billion two years earlier. With the 40% rise in shareholders’ equity that accompanied the decline in debt, Générale des Eaux’s financial structure is now satisfactory. The level of debt may even be too low given the nature of the Group’s businesses.

Projections for 1998 indicate a 10% increase in net income for the year, which would be a new high. Operating income less net financial expense is expected to show the sharpest rise. At more than FF4.5 billion, it would be more than double the 1997 figure. Operating income is also expected to increase more than 50%. We believe 1998 will be a pivotal year for Générale des Eaux’s structural balance. During the second half of the year, SFR’s operating income is expected to reach the same level as that of the water sector in France, which itself is on an upward trend. Overall, Cegetel’s operations are set to break even, despite the costs involved in launching the "7" fixed-line service. The company aims to generate net income in 1999. The initial response to the "7" service is very promising – there were 100,000 subscribers by the beginning of March, with 600,000 forecast by the end of the year.

Restructured and healthy, Générale des Eaux is now proposing to turn a new page in its long history – a merger with Havas, followed by the creation of a wholly-owned subsidiary. Far from being a diversification, this is the next step in the expansion of one of the core businesses – communications – selected as strategically important some years ago.

As you know, our involvement in the field of communications is not recent. It stretches back more than 15 years. Guy Dejouany was quick to react to his intuition that Générale des Eaux had an important role to play in this area. That was how the Group came to participate in the creation of the Canal Plus pay TV channel. It has since provided active support throughout the development of Canal Plus. The channel has been a great success, and Canal Plus now leads Europe in pay TV and digital technology. Générale des Eaux also went into the cable TV business, an activity that has now been transferred to Canal Plus. The Group took part in the launch of specialist channels through Générale d’Images, and moved into the film industry (UGC) and telecommunications, with SFR. The main events in 1997 were the launch of Cegetel and our acquisition of a 30% stake in Havas.

Our expansion in communications has taken on its full meaning with the projected merger with Havas. If you and the shareholders of Havas approve the merger proposal, it will create a powerful communications concern within Générale des Eaux that will be capable of challenging the multinationals that operate in this industry.

The new division will encompass three distinct businesses – telecommunications with Cegetel; publishing, multimedia and advertising with Havas; and audiovisual activities through the Group’s 34% direct shareholding in Canal Plus. All three businesses will be autonomous. Whenever necessary, they will be able to work together on new product ideas and exploit commercial synergy. Our strategy gives pride of place to the customer, not to technology, because customers of SFR, Canal Plus, Internet, Canal Satellite and Havas Interactive have similar profiles and expectations. To build customer loyalty, it is essential to offer all the services they expect by pooling the creativity of our teams.

The terms of the merger with Havas are favourable to Havas and Générale des Eaux shareholders alike. It will, for example, have no adverse impact on net earnings per share. Quite the reverse is true – the fiscal integration of Havas will give Générale des Eaux shareholders an increase of some 3-4% in earnings per share in the first year, followed by 4-5% in 1999.

In addition, the proposed merger will have no impact on Générale des Eaux’s newly-found financial flexibility – the debt-to-equity ratio will remain virtually unchanged. This ratio makes it possible for us to give each of our major businesses the resources they need for growth.

We have now completed the financial restructuring programme started two years ago. The Utilities Division teams have been very dynamic, especially in international markets. The Construction & Property Division has returned to break-even, and we are entering a new expansion phase in Communications. Générale des Eaux is back on the offensive and ready to attack the twenty-first century. The Group is stronger, with market capitalization that will exceed FF150 billion. It is more balanced – net sales are spread between Utilities (50%), Communications (30%), and Construction & Property (20%). Local authorities will account for 30% of Générale des Eaux’s business, and the remainder will come from the private sector (45% end consumer, 25% corporate customers). The Group will also be more international, with the arrival of a very experienced non-French director on the Board.

Générale des Eaux will soon have a new name, which will help in its quest to meet customer expectations and create value for its shareholders. It will have everything needed to make it a world-leading company.

Jean-Marie Messier
Chairman and CEO

* on a like-to-like basis and at constant exchange rates and methods

Générale des Eaux's mission is to ensure that everyone, every day has access to basic utilities, and to improve daily life constantly.

Générale des Eaux is world leader in water supply, European leader in energy, the world's third largest operator in waste management and related activities, and a major player in the transport sector. These activities make Générale des Eaux one of the top international groups in utilities.

(from Vivendi www site, July 1998)

As we approach the 21st century deregulation of developed economies, economic liberalization in developing countries and an emphasis on cleaner fuels are creating significant growth opportunities for companies such as Enron. As these trends evolve and alter traditional energy infrastructure requirements, energy companies that take an early lead in identifying these changes and creating solutions for customers are poised to experience significant growth. By combining Enron's first-mover advantage with our project development, asset management, marketing, finance, regulatory and risk management expertise, we believe our company is better positioned than any other to benefit from these significant market changes.


The deregulation of monopolies in developed countries is a large-scale trend from which Enron has benefited in the past and is helping to lead today. In the early 1980s, we identified restructuring opportunities in the U.S. wholesale natural gas market and led our industry in restructuring the natural gas transportation and marketing functions. We created market-responsive energy products and services with our strong base of people, financial expertise, asset management, marketing skills and strategic regulatory approaches. The competitive market that evolved from the deregulation of the wholesale natural gas market led to the creation of high-growth businesses and resulted in lower prices and greater diversity of products and services for customers.

In the early 1990s, we identified many of the same opportunities in the wholesale electricity market, which is continuing to deregulate in both the U.S. and Europe. By transferring our wholesale gas market expertise to the electricity market, we established similar high-caliber products and services for our customers. Today, we are the leading natural gas and electricity wholesale marketer in North America and are rapidly expanding our European operations.

In developing countries around the world - places such as Brazil, China and India - we are witnessing a trend toward the liberalization of economic policies. For the first time in many nations, governments are altering their policies in favor of private energy infrastructure investments that will strengthen their economies and position them to compete in the global marketplace. These governments want to form alliances with experienced energy developers and managers who will support their energy needs and maintain a long-term presence in their countries.

Through the relationships we have established, and with the assets and other energy services we have created and are managing in markets such as Argentina, Colombia, Guatemala and Trinidad, we believe Enron is extremely well positioned to succeed in these economies. Our expertise lies in creating markets to better serve local energy customers. As reflected by our current efforts in Bolivia, Brazil, India and other countries around the world, we are developing projects that address substantial energy needs and contribute to broad energy infrastructure. We are willing to invest our time and expertise in assisting governments with their energy programs because we have experienced firsthand, both in developed and developing countries, how these alliances benefit customers and help our company establish an even stronger base from which to create worldwide integrated energy solutions.

High population growth rates and a concern over rising pollution have caused many nations around the world to insist on cleaner solutions for their energy needs. This clean energy trend has led to increased demand for natural gas, one of the cleanest fossil fuels available.

Worldwide, natural gas demand has increased from 66 trillion cubic feet (Tcf) in 1987 to 82 Tcf in 1996 and by 2005 the demand is expected to increase to 104 Tcf. In addition, rapid improvements in renewable energy technology and greater economies of scale are lowering renewable energy prices and creating significant market share opportunities for solar and wind energy products.

Enron has a successful track record as a natural gas developer, transporter and marketer and maintains a strong leadership position in the development of other clean energy businesses. We design and manufacture competitively priced wind turbines, partner in a successful joint venture that develops solar energy applications and are investing in the development of technology that lowers the environmental cost of energy production. We believe these activities, and others that we are pursuing, have put our company in an extremely strong position to benefit from the clean energy trend.

(from Enron www site, July 1998)

Hyder is a large UK multi-utility company formed when Welsh Water, the regional water monopoly for Wales, took over SWALEC, the electricity distribution monopoly for south Wales. In 1996-1997 its turnover was £1,140.2m, and its pre-tax profits £208.2m.

Hyder has cut the number employed on its water operations from 3397 in 1990, when the company was privatised, to 2744 in 1996. One way it has done this is through sub-contracting maintenance work. Even bigger job cuts have been made since the merger to generate savings: a total of 1,250 jobs are being cut.

"HYDER, the water and electricity utility based in South Wales, said yesterday it would cut 350 jobs on top of 900 already announced as the company moved to squeeze more savings out of the combined business. The group, which has a work force of 9,000, said it would bring all its utility businesses into one division. The expanding infrastructure businesses, including engineering and contracting, will also be brought under one roof. The move would create pounds 15 million a year in savings by the turn of the century on top of the pounds 100 million cost reduction Hyder expects from the merging of Welsh Water and South Wales Electricity (Swalec), the group said." (Guardian 03 Oct 97)

The water company has introduced a personal pay system for its employees, but Hyder has continued to recognise and consult trade unions.

Like the other UK water companies, Hyder's performance record is not outstanding. It has been guilty of polluting drinking water supplies more often than any other UK company. It has installed over 10,000 'budget pay ment units' - two-thirds of the total installed by all UK companies - which mean that people unable to pay their water bills can cut themselves off by failing to put enough money in the meter.

Hyder was hit hard by the 'windfall tax' imposed by the new Labour government in the UK on the excessive profits of the privatised utilities. The company has raised a loan of $500m in the USA to pay this tax bill, for which it has been given a credit rating of A-, a reduction from its previous standing of A+.

Hyder's strategy in the UK is to make itself a 'multi-utility' company selling water, electricity and gas to the same customers - although not telecomms services, which it has abandoned.It has formed a unified management structure for these services. ' ...Hyder, formed by Welsh Water's Pounds 893m takeover of Swalec in January 1996, quit telecoms last year. Instead it is developing road and rail infrastructure activities. Mr Paul Twamley, finance director, said: 'What utilities are good at is whole life management of assets. In expanding our infrastructure business, we are extending our basic utility skills.' (FT 07 Aug 97)

United Utilities was created in 1996 by a merger between two of the utility companies privatised by the Thatcher government at the end of the 1980s. North West Water, the regional water and sewerage company covering the North West of England, took over Norweb, the regional electricity supply company covering roughly the same area.

North West Water tried to diversify from its local water monopoly base ever since its creation in 1989, but never succeeded in making a profit. The main areas it moved into were international water contracting, and process engineering. In 1995 the company sold its construction division to Bechtel Inc (USA), with whom it then formed an joint venture to bid for future international BOT work. The company also made expensive mistakes in developing its computer systems.

In 1996 the company took over Norweb, and announced plans to cut over 2000 jobs. The company also merged the computer sections into a new division called Vertex, and provoked a dispute by attempting to end recognition of trade unions in Vertex. It later withdrew this threat, and instead formed a group-wide works council.

The newly merged company then set about getting rid of the loss-making businesses, and in 1996 and 1997 wrote off a total of £207 million by selling the process engineering companies, and by accepting huge losses on a contract in Thailand. UU was restructured, and announced its intention to compete in other utility areas such as telecomms and gas supply, and also to offer computer facilities management services to other companies.

It remains active in as an international water company, and has contracts in Malaysia, Australia, Mexico, and the Philippines, where it was awarded a contract in Manila in 1997. It has also gained an electricity supply contract in Argentina.

United Utilities: latest results (£million)

UU and North West Water have always managed to pay generous dividends to shareholders. In 1995, the company announced that it had managed to "save" £400m by investing less than it had said it would, while still charging the same prices. North west Water claimed it was giving customers half the benefit, but this was untrue, as the Financial Times Lex column pointed out: "…. NW Water has been fairly shrewd in offering what amounts to a bribe to its customers not to kick up a political stink as it increases dividends. Even if the company has not bought off the Labour party, it has neutralised the regulator. Moreover, on closer examination, shareholders do rather better out of NW Water's plans than the rhetoric promising a 50:50 split of efficiency gains with customers suggests. Out of £400m saved on capital spending since privatisation and further large efficiencies in operating costs, only £90m is being paid to customers. The main benefit to shareholders is not the £90m special dividend they will receive over five years; it is rather the double-digit increases in ordinary dividends that should be possible by gearing up its balance sheet and cutting dividend cover from three to two times. If the comparatively small payment to customers secures the regulator's blessing for a bigger payment to shareholders, it is a bribe worth paying." (FT 31 Mar 95)

UU has made huge savings since the merger in 1996, which involved getting rid of over 2,000 jobs in the group. The company has set itself a target to realise £474million for shareholders, by the year 2000, from these post-merger rationalisations.

The company has however had to make expensive write-offs of loss-making operations.

• restructuring costs of £123.8m in 1996
• provision of £83m in 1996/97 on account of the problems with their contract in Bangkok.

UU seeks to minimise its own risks in international investment: "Our strategic approach to the international marketplace is strongly founded on risk avoidance, and careful management of those risks which cannot be avoided. We minimise the use of equity, but seek good returns where equity is applied" (UU Ann Rep 1997 p. 14).

The company thinks it has succeeded in Manila, where it owns about 20% of the concession and has invested only £10million of equity: "The Manila contract is a good example of our low risk strategy, with a guaranteed rate of return which we fully expect to succeed, relatively low equity engaged, fully non-recourse finance and strong local and international partners" (UU Ann Rep 1997 p. 15). Financial commentators were still unimpressed, however:"London analysts expressed concern at the terms of the contract….United Utilities shares fell 6.5p to 671p, while shares in Anglian Water, which failed to win the contract, rose 8.5p" (Financial Times 24 Jan 1997)

The company aims to be "a focussed multi-utility service provider" (Ann Rep 1997), expanding from water and electricity into gas and telecoms. In 1996-1997 was a disposal programme, to get rid of unprofitable activities. UU also intends to continue bidding for international contracts, in both water and electricity.

In 1997, the UK water and electricity business still accounted for 90% of the company's turnover and profits. The gas supply, telecoms and computer facilities management businesses are still dreams rather than reality. The company no longer has a construction division, which was sold to Bechtel in 1995. The process engineering companies were sold in 1996-1997.

It is trying to expand into three new areas in the UK:

• Gas supply (which is being opened up to competition)
• Telecoms services
• Computer facilities management contracting

The company sees potential problems arising in the UK from:

• Competition from others in electricity supply
• Tougher regulation of both water and electricity under the new Labour government in the UK
• The "windfall tax" on utility profits applied by the new Labour government.

In international business, UU states that its main aim is to minimise risk. It mentions three tactics in particular:

• Minimal use of equity investment
• Being "highly selective both about the countries in which we are willing to invest" (Ann Rep 1997 p. 14)
• Working in partnership with other companies, which "also helps to minimise our equity requirements" and with "powerful local partners…bringing local understanding and influence" (Ann Rep 1997 p.14)