THE WALL STREET JOURNAL: Knight Aims Lance at Suez: “Under pressure from him and other shareholders, Shell agreed to merge its Dutch and British holding companies and adopt a single board.” (ShellNews.net) 3 June 05
U.S. Investor Who Pressed
Shell to Overhaul Structure
Now Targets French Utility
By JO WRIGHTON
Staff Reporter of THE WALL STREET JOURNAL
June 3, 2005
PARIS -- U.S. investor Eric Knight raised his profile last year by campaigning to overhaul oil major Royal Dutch/Shell Group's antiquated corporate structure. Under pressure from him and other shareholders, Shell agreed to merge its Dutch and British holding companies and adopt a single board.
Now Mr. Knight is taking aim at France's Suez SA, one of the world's largest publicly traded utility companies and a blue-chip stock on the Paris stock exchange. Suez derives its name from the Suez Canal, which it helped finance in the mid-1800s. It generates €40 billion in annual revenue from power, water and waste businesses around the world.
Mr. Knight, who heads Knight Vinke Asset Management, is one of an increasing number of U.S. and British fund managers whose activism is shaking up European companies once insulated from pressure by cozy relationships between executives and their boards and by shareholder apathy.
Last month, New York hedge fund Atticus Capital and Children's Investment Fund Management (U.K.) LLP of London helped oust the chief executive of Deutsche Börse AG in the wake of the German stock-exchange operator's botched bid for London Stock Exchange PLC. In 2003, Fidelity Investments led the charge to unseat Michael Green as chairman-designate of British media group ITV PLC.
"Even institutional shareholders with small stakes are becoming more powerful" in Europe, says Pierre Péladeau, a partner at management-consulting firm Booz Allen Hamilton in Paris. "Management needs to react to their concerns." Last year, European CEOs were twice as likely to be fired as their North American counterparts, according to a recent Booz Allen study.
Mr. Knight holds just 0.2% of Suez's shares in his fund, but last December decided to launch a vocal campaign to make Suez reorganize its business. He wants the French company to either buy out the minority shareholders of Belgian power utility Electrabel SA or sell its 50.1% stake in it. Electrabel accounted for slightly less than one-third of Suez's €1.1 billion profit last year, and it generates a steady cash flow. Mr. Knight says the current partial ownership structure is destroying shareholder value at both Suez and Electrabel, in which he also owns shares. "Suez has to decide what is part of its core business and what is not," he says.
By either buying all of Electrabel or selling its stake in it, Suez could as much as double the price of its shares, Mr. Knight argues. He estimates that Suez shares could be valued at €35 to €40 each and that Electrabel shares could rise to between €420 and €450 each. Suez shares currently trade at €22.80 in Paris, while Electrabel shares trade at €363.80 in Brussels.
Suez could turn out to be a tougher target for Mr. Knight than Shell, which already had been under intense investor scrutiny for having vastly overstated its oil reserves. So far, Suez CEO Gerard Mestrallet has dismissed Mr. Knight's demands. He has called some of Mr. Knight's arguments "fallacious" and has said Suez's controlling majority stake in Electrabel "suits us."
"It's not the shareholders that decide the strategy of a company, it's the board of directors," says a person close to Suez. Mr. Mestrallet declined to be interviewed for this article.
With Suez returning to profitability after several difficult years, analysts say it will be tough to force changes on Mr. Mestrallet, who has been at the company's helm since 1997. Suez shares have risen steadily in the past six months, although they still are well below the 2001 peak of €38.
Mr. Mestrallet has survived other storms. He held onto his job in 2002 and 2003 when a dozen other top French CEOs were ousted amid the bear market. Lambasted for taking on too much debt, he weathered the complaints, pushed out his chief financial officer and sold numerous businesses in a short time span, many of them at a loss. That brought Suez's debt back down to a manageable €11.5 billion from €28 billion in 2002.
Mr. Knight is undeterred. "We're increasing the pressure at every turn," says the 46-year-old investor, who lives in Switzerland and manages $500 million (€409 million) in assets. The California Public Employees' Retirement System, which is a big investor in Knight Vinke, is backing Mr. Knight's campaign. The late French financier Edouard Stern, who was murdered by his mistress in February, also was a big investor in Mr. Knight's fund, and his family has said it will continue that investment, though it won't comment about Suez.
Mr. Knight has badgered Suez's and Electrabel's boards with letters and has called for a judicial inquiry in Belgium to determine whether Suez has damaged the interests of Electrabel and its minority shareholders. He has threatened to sue Electrabel's board, which Mr. Mestrallet chairs, depending on the outcome of that inquiry.
At Electrabel's recent annual shareholder meeting, Mr. Mestrallet responded to the 10 questions Mr. Knight sent the company's directors. Mr. Knight says he is still reviewing those answers and will send a written response to Mr. Mestrallet shortly.
Mr. Knight has rallied other fund managers in London, Paris, Frankfurt and Brussels and says investors accounting for 8% of Suez's shares now agree with his analysis. "We're building a consensus as we did at Shell," he says.
So far, Albert Frère, the Belgian tycoon who is Suez's vice chairman and its single largest shareholder, with a 7.1% stake, has publicly stood by Mr. Mestrallet. Still, Mr. Knight is winning over such big investors as Thomas Dreser, a fund manager at Union Investment in Frankfurt. Mr. Dreser says Knight Vinke's calls for restructuring eventually will have to be heard. "If Suez's management does nothing at all, then we may address some of these issues ourselves at the next shareholder meeting," Mr. Dreser says. Union Investment owns slightly less than 1% of Suez, according to data from Thomson Financial.
Another investor, Bruno Berry, a European fund manager at Morley Asset Management in London, says he welcomes Mr. Knight's campaign because "it keeps management on its toes." He says he doesn't plan to join it. "Now that Suez's management has refocused its strategy" by selling nonutility businesses, such as two French television networks and a Paris cable company, as well as noncore investments in finance and oil, "I think their case is much weaker," Mr. Berry says. Morley owns 0.3% of Suez.
Mr. Knight's shareholder activism has drawn some criticism in France, where rebellious investors are somewhat rare. John Honore, an analyst at French bank Société Générale, recently wrote in a research report that he thought Mr. Knight's interest in Suez was "motivated purely by personal and financial reasons," and suggested he was a short-term investor out to make a quick return.
"His campaign is nonsense," Mr. Honore says. "Suez will restructure anyway, with or without Eric Knight."
Mr. Knight denies he invested in Suez for the short term. He says he plans to hold his shares for at least three years and maybe longer. He also notes that his team at Knight Vinke has invested a lot of time researching the company -- 8,000 hours by his estimate.
Mr. Knight's strategy of investing in just a handful of underperforming companies paid off last year with a return of 28%. He currently only holds six stocks, including Shell, Italian oil-and-gas company ENI SpA and Dutch media company VNU NV, so one mistake could hurt the fund's performance badly.
Write to Jo Wrighton at jo.wrighton@wsj.com
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