Vivendi Splits Water Utilities
Associated Newspapers Ltd., re-written by Larry Chertoff

Vivendi, the giant French conglomerate is to carve itself into two. Chief executive Jean-Marie Messier is splitting off the group's utilities arm under the name Vivendi Utilities, leaving the rest of Vivendi to develop its fast-growing media operation into a global business.

The trigger for the demerger, scheduled for 2002, was the $6.2 billion acquisition of American water purification company US Filter, last month. It will give the group's water and waste arm a powerful presence in the US market, which had previously been its Achilles heel, and make it the world leader in this field.

But the US acquisition is not just about scale. It will also open up a new market and provide new skills when the European water supply business, upon which Vivendi has been built over the past century and a half, shows signs of faltering. Earlier this year Compagnie Gènèrale des Eaux, the group's French water arm, was obliged to cut its charges to residents of the Mediterranean town of Hyères by almost 9%. The reduction came after the local council hired a firm of consultants, Service Public 2000, to run a fine-tooth comb through the contract under which CGE supplies the town.

All over France, under pressure from voters fed up with rising charges, councils are hiring experts capable of taking on CGE and its chief domestic rival, Lyonnaise des Eaux, and they are starting to win.

In Europe, the opportunities once offered by privatization and liberalization are dulling as markets mature. And as water costs rise in response to higher purity standards, charges will be scrutinised more closely still.

In the US, the 1996 Safe Drinking Water Act and other Federal and state laws oblige local authorities to renovate their water and sewage systems. Many do not have the money. So, increasingly, they are turning over maintenance contracts to private operators.

The acquisition of US Filter will give Vivendi Utilities a foothold in this fast-growing market, and a filter-manufacturing arm. It will also bring a strong portfolio of contracts to deal with the water and waste needs of US companies - a new skill with which it hopes to revitalize its European business.

The demerged business, with sales forecast to reach $20 billion this year, will have a solid financial base since Vivendi plans to retain 67%.

The parent group, meanwhile, will focus on building its telecoms and media businesses. These businesses originated when Vivendi started to apply its utility skills to installing cable television. It has since learned how to provide programming, launching Europe's first pay-TV station, Canal Plus, and becoming a leading player in French mobile telephony and Internet access.

The US Filter acquisition has enabled Messier to build and now detach the world's leading water business. But even with his hands free, achieving a similar feat with the group's communications arm in a world dominated by American giants and the English language, will be a daunting challenge.

© Associated Newspapers Ltd., 16 April 1999