FT Energy Newsletters - Global Water Report | December 21, 2000
When Axurix burst onto the staid water scene in 1998, the company claimed it was out to achieve global domination of the sector. Analysts always wondered whether Enron would be prepared fo support Azurix for the long haul. Now the industry has its answer.Enron is to reacquire Azurix for about $325m, taking the company private only 18 months after its initial public offering. Enron paid $2.8bn for the UK's Wessex Water in 1998.
In October Enron proposed lending Azurix Dollars 275m to buy back its publicly held shares for about Dollars 7 per share, but shareholders went to court, claiming the offer was too low. The suit has now been settled as part of the new deal. In June 1999 Azurix' initial offering price was Dollars 19 per share. Now Enron has given Azurix shareholders a little Christmas surprise with the 15 December offer that it would buy out the remaining shares for Dollars 8.375, including Dollars 2.5m to cover transaction fees and lawsuits. Observers speculate that Enron, having paid such a miniscule price to buy back the company, will bide its time until, for instance, new environmental cleanup regulations are passed sometime in 2001 in the US. Some always thought that the strategy of a trader's approach with the launch of initial public offerings, paired with inadequate knowledge of the water industry, was a recipe for disaster.
Enron already controls two-thirds of Azurix through an investor group, Atlantic Water Trust, in which it holds a 50% voting interest and it has also agreed to convert Dollars 180m in debt that Azurix owes it into Azurix preferred stock - giving it preference in any liquidation of assets.
Azurix and Rebecca Mark believed that they could make large profits through Wessex Water; a dream scotched by the tough regulatory review handed down earlier this year which called for a 12% price cut. Wessex appears to have performed relatively well, posting a better-than-expected 6% revenue decline, suggesting that it has improved a little on the general lacklustre performance of English water companies. This cut no ice with Enron however, a company which normally takes a very short-term approach to investments. Azurix has proved to be no exception.
The company blamed the deterioration of sterling in relation to the dollar for its poor third quarter results when it announced a net loss of Dollars 3.6m on revenue of Dollars 183.7m, compared with net income for the third quarter 1999 of Dollars 18.8m, and revenue of Dollars 170.5m. "Further weakening of the pound negatively impacted Azurix's reported US dollar results," said president John L Garrison. The company had projected the sterling exchange rate at Dollars 1.50 to one pound, but it recently fell of Dollars 1.43. He added that operations in Buenos Aires had failed to achieve the expected revenue, but the company was "negotiating to ensure we receive the proper tariffs as specified in the terms of our concession contract. We also are seeking reductions in the required capital programme commensurate with the revenues we are receiving and are continuing to negotiate claims against the province, which involve its failure to perform according to the terms of the contract." Azurix bid Dollars 438.6m for the 30-year concessions, which included the large industrial city of Bahia Blanca and Region C, with a population of 1,520,000, including the industrial centre of La Plata and the rural areas in the interior.
And at a recent UK Canning House Conference in October, Hugo Toledo from Mexico's Comission Nacional Del Agua, pointed to less than stellar performance from Azurix in Cancun, which he said had received minimal investment so far. He reported lacklustre progress for the same company in Mexico City.
Enron is expected to sell off Azurix assets, either wholesale or piecemeal, with the timing partially dependent on its own accounting issues as the company would like to minimise the size of a writedown. Proxy materials are to go out to shareholders immediately, with a vote likely in the first few weeks of 2001. Securities and antitrust agency clearances will also be required but are not expected to present major obstacles.
Possible purchasers mooted
Amongst the speculation surrounding a possible buyer, it had been widely rumoured that E.on was interested. But E.on chairman Ulrich Hartmann has stamped on this speculation, stating that whilst E.on was keen to expand its 15% market share in Germany further, it had ceased negotiations with Azurix because "it would not have made business sense to become involved in the company." However, he added that E.on would reconsider that decision if individual parts of Azurix came up for sale. Whatever happened, he said, E.on would not act under time pressure. "We will make our decisions objectively and according to sound business criteria," he said.
Azurix pulls out of Moroccan bid
A further casualty from the Azurix meltdown is the Azurix-Enron water and power package proposed for Tangier and Tetouan. Together with the locals SNCE and Seprob, they have withdrawn their bid for the concession. An announcement for the water, sewerage and electricity project is expected by March 2001, with Vivendi and Saur tipped as frontrunners.
Meanwhile, in Houston, Enron chief executive Kenneth Lay is to hand over his post to Jeffrey Skilling in February 2001. Lay will remain as chairman of the board. "The best time for succession is when the successor is ready and when the company is well-positioned for the future," Lay said in a written statement. "With Jeff's promotion, succession is clear, our deep pool of management talent remains intact, and no other organisational changes need to be made to take the company to new levels of growth."
In 1998, not long after Enron bought electric utility Portland General, Skilling served in an 'office of the chairman' at Enron. Skilling was Enron president, Lay chairman, Rebecca Mark and Ken Harrison - who came from Portland General - were vice-chairmen. However, with the departure of Mark following Azurix's failure to shine, Harrison left to continue running Portland, leaving Skilling as the heir apparent to Lay. Now Enron is selling Portland General in a deal expected to close early 2001.
Azurix appeared on the scene like a bright, glittering pebble lying on the bottom of a sunlit stream. But once removed from their element, such pebbles become dull lumps of rock. One water boss, speaking of the inevitability of Azurix's failure bearing in mind what he considered a flawed strategy, said he had been surprised that Mark did not fail earlier, "but this is a reflection of her capability," and the respect with which she was held in Enron. "You win some, you lose some," he said. It seems that, as in poker, the winners in the water business will be those with the deepest pockets who can hang in the longest in order to reap the rewards.FT Energy Newsletters - Global Water Report:
