UPDATE 2-Utility Veolia shrinks to return to growth

Thu Aug 4, 2011 6:59am EDT

Related Topics

* To exit half of countries where currently operates

* Sees extra savings of 250 mln-300 mln euros a yr by 2015

* Swings to H1 loss; shares fall 12.6 pct

(Adds CEO, analyst comments, detail, updates shares)

By Caroline Jacobs and Benjamin Mallet

PARIS, Aug 4 (Reuters) - France's Veolia Environnement aims to dramatically shrink its operations in an effort to return to growth, marking a clear break with an earlier expansion strategy at the world's biggest listed water group.

Swinging to a first-half loss on Thursday, Veolia said it would focus on fewer than 40 countries -- down from 77 -- and quit activities such as transport in Morocco, environmental services in Egypt and marine services in the United States.

Chief Executive and Chairman Antoine Frerot's move to speed up a substantial overhaul of Veolia comes after the acquisition spree under his predecessor Henri Proglio, now head of utility EDF , ended in 2009 to focus on making cash and cutting debt.

"We will have a smaller group in the next 18 months ... It will be smaller but more profitable," Frerot said at Veolia's earnings and restructuring presentation.

"The pressure we have seen on prices for our services forces us to go faster and further," Frerot said. "The results develop much too slow, which is why I want to accelerate very significantly the transformation of the group."

Frerot declined to say which countries Veolia would seek to leave, what divestments could yield or how many jobs could go.

Veolia shares were down 12.6 percent to 12.5 euros at 1057 GMT after earlier rising 3 percent, taking a further hit after the company warned investors last week it would fail to meet several of its financial goals and that its restructuring would cost 800 million euros in asset impairments and writedowns.

"This heavy restructuring ... which cleans up the mistakes and inertia inherited from the previous management, is positive," said a Paris-based analyst who declined to be named.

"The question remains on visibility on a return to growth in 2012 and 2013 ... and on next year's dividend payment.

Veolia, which provided drinking water to more than 100 million people and processed some 63 million tonnes of waste last year, said it would keep a high dividend pay-out ratio to adjusted net income, down 28.5 percent at 188 million euros in the first half of this year.

Some analysts had expected Veolia to announce a change in its dividend policy. Veolia has left its dividend unchanged at 1.21 euros a share for the past three years, even when the world economic crisis led it to give two profit warnings in 2008.

The group made a net loss of 67.2 million euros against a profit of 374 million and sales rose to 16.3 billion euros from 14.1 billion a year-ago.

"The results are a mess but the restructuring is very positive. They are really doing what we want to see: a complete change in company strategy," RBS analyst Jean Farah said.

Veolia extended its cost savings programme to 2015 with annual cost savings of 250 million to 300 million euros and unveiled a team led by chief operating officer Denis Gasquet tasked with implementing it.

Frerot took on the chairman's role in December, succeeding Proglio, who had remained Veolia chairman after becoming EDF CEO in November 2009. Proglio is still a director at Veolia, which has several ties with EDF. EDF owns a 4 percent stake in Veolia and both own Dalkia energy services.

Veolia sold assets worth more than 1 billion euros in the first half while it has said it wants to make divestments worth at least 1.3 billion euros this year. It has a 4 billion asset sale programme in place for the years through to 2013.

Veolia's marine services in the United States were part of an accounting fraud but Veolia said this had no impact on its earnings and that the amounts were not significant.

The company plans to hold an investor day at the end of the year. (Editing by James Regan and Erica Billingham)

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