INSIGHT: Veolia aims to create global giant in recycling, waste with Suez takeover offer

Author: Mark Victory


LONDON (ICIS)--Veolia’s has launched an unsolicited offer to acquire Suez, eyeing the creation of the largest waste and recycling management group in the world.

Each firm is individually a global recycling and waste management major - in 2019, Veolia revenue posted sales of €27.2bn, while Suez's stood at €18.02bn; both are headquartered in Paris.

Veolia announced its unsolicited offer to acquire Engie’s 29.9% stake in waste and water group Suez on 30 August.

It added it would file a voluntary tender for the remaining Suez shares within 12-18 months if the offer is accepted, subject to regulatory approval.

Helen McGeough, Senior Analyst and Global Analyst Team Lead for Plastics Recycling at ICIS, said consolidation in the recycling supply chain will be an increasing feature, adding that this takeover, if successful, could place the combined company in a strong position to take a leading role in waste management across the globe.

"Both companies have been actively investing in infrastructures: collection, sorting and reprocessing, across multiple markets and their experience and expertise is vital to progressing efficient systems for plastic waste," said McGeough.

"The merger has the potential to bring increased harmonisation of systems throughout the waste infrastructure, something which has lacked focus and advancement to date."

Veolia also identified that the potential merger would strengthen its position in Spain, northern Europe, North America, and Asia, and double its size in South America and Australia.

Recycling chains have been under pressure in 2020 due to the impact of the coronavirus.

Players across recycled polymers shifted back to virgin in the wake of the pandemic, with low virgin polymer prices having been a major driver of this, particularly for non-packaging applications.

Workforce shortages and logistic problems also contributed.

Subsequently, Q2 packaging demand was 20-30% lower year on year, despite wider strong underlying demand for the sector.

For non-packaging demand, lockdown restrictions severely limited consumption for key end-use recycling markets such as construction, automotive and fibres.

Demand from these industries had already been weakening prior to pandemic because of negative macroeconomic conditions.

This has placed recycling manufacturers under significant pressure. Recycling producers typically have lower cash reserves than petrochemicals firms, and a positive demand outlook led to heavy investment in the build up to the pandemic, creating large-scale debts that need to be serviced.

The financial pressure on the chain was highlighted by both companies' Q2 financials - Veolia's sales fell 10.8%, year on year, and Suez's sales in recycling and recovery down 12.7%.

Nevertheless, consumer and regulatory pressure on sustainability remains high and is expected to increase in the mid-term due to a raft of fast moving consumer goods (FMCG) brand pledges for the use of recycled content, coupled with increased interest from petrochemicals firms.

ICIS predicted that this would lead to mergers and acquisitions before the end of the year in its mid-year global review.

Veolia's takeover offer follows an announcement from Engie on 31 July that it will launch a strategic review of its portfolio, including its stake in Suez.

It also follows an agreement reached in August under which Veolia is to acquire Suez's sanitation maintenance subsidiary Suez RV OSIS.

Aware that antitrust authorities may demand divestments so the resulting company does not have a dominant position in the market, Veolia said that it would divest Suez’s French water activities to Meridiam if the takeover transaction was successful; it added Meridiam has already committed to the acquisition.

Veolia also said it had identified for potential divestments, once the takeover was complete, certain of Suez's waste management assets  in France and a few cases outside of France.

Suez said it had not engaged in any formal discussions with Veolia about a potential merger prior to the unsolicited offer.

The Suez board met on 31 August to discuss the offer, setting up an ad-hoc committee to examine the proposal, although the initial reaction - at least publicly - was not welcoming.

"The strategy proposed by Veolia would generate dis-synergies and loss of opportunity in France and abroad," said Suez in a press release.

"In addition, the complexity of the chosen process would lead to two years of operational disruption whilst, in a post-Covid context, the teams are focused on implementing their strategic plan."

Insight by Mark Victory