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Analysis

Engie under pressure as it embarks on slimming plan

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Even by 2020 standards Engie has had a difficult year. The French energy group ousted a chief executive, hired another, dramatically changed strategy and sold a €3.4bn stake in water and waste group Suez, kicking off a corporate fight that is still shaking the world of French business. 

Now the company has to prove to investors it can turn itself round under a new leader as it shifts away from services to focus on energy infrastructure and renewable power — while making sure it does not become a takeover target in the process.

“We needed to tick the box on some big subjects like Suez,” Jean-Pierre Clamadieu, Engie chairman, told the Financial Times. “With these boxes ticked, quarter after quarter, we need to demonstrate that, indeed, growth is happening where we expect it to happen. Now it’s not just aspirational.”

Engie’s planned asset sales next year include the carve-out of a customer services business that employs 74,000 of the group’s 170,000-strong workforce and brought in 20 per cent of last year’s €60bn in sales.

The company has yet to decide if this will be done through an initial public offering or a sale to private equity, and Mr Clamadieu is searching for a management team to run the new business. But whatever route it takes, the pressure is on.

“Engie has to gain in value faster than it sells assets, that’s the game next year,” said one banker close to the group. 

Mr Clamadieu admits the company has had a “hard crisis” — it cancelled its dividend — a rare and painful move for a utility. Despite a relatively good third quarter, its share price has fallen about 13 per cent over the course of the year and its market capitalisation stands at roughly €31bn.

The task of turning the company’s strategy into a business plan will fall to Catherine MacGregor, a former executive at oilfield services group Schlumberger who takes over as chief executive in January.

Mr Clamadieu’s job, in part, will be to manage Engie’s largest shareholder with a 24 per cent stake: the French state.

Paris has a reputation as a heavy-handed shareholder. Its board representatives voted against Engie’s October sale of 29.9 per cent of its 32 per cent stake in Suez.

The fact Engie went ahead with the sale has been seen as a significant moment in its relationship with the government, but Mr Clamadieu plays the matter down. France is planning to sell down its holding but there is no timetable, and Engie’s valuation means it is not rushing to market. 

Previous chief executive Isabelle Kocher, a former civil servant who tried to radically overhaul the company, was forced out in February.

To her supporters Ms Kocher reinvented Engie as a green energy champion focused on services, and faced opposition from entrenched interests resistant to change. But critics say she struggled to take hard decisions — including whether to sell the Suez stake or buy more — and failed to translate her vision into a functioning business model. Senior Engie figures say privately that Ms Kocher was more focused on the big picture than “nuts and bolts” work.

Engie, in the eyes of investors, had become too hard to understand. And in the eyes of Mr Clamadieu, it had become too complicated internally, making decisions slow and painful.

The chairman said the current structure of the company, made up of 27 business units in almost 70 countries, remained “very complex and is very difficult for a CEO and an executive committee to supervise.”

He believes processes within the group need to be sped up.

“One of the business unit heads was presenting her project to the board and she told me that she had more than 150 people from corporate areas asking questions in the process where this project was prepared and then delivered to the board.”

Engie plans to plough at least some of the money it raises from the asset sales into building up its renewables portfolio. Mr Clamadieu said the company would continue to grow but that larger scale M&A was not on the radar.

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It is also looking at winding down its Belgian nuclear operations, in line with the country’s energy plans. Engie has provisioned about €13bn for the eventual shutdown, including dismantling the plants and disposing of the nuclear waste.

While Engie’s changes are designed to make the group easier to understand, they also expose it to a new type of competition, from pension and infrastructure funds as well as oil and gas majors such as Total.

Vincent Ayral at JPMorgan, said that meant Engie would “ultimately” become “an M&A target over the medium to long term, like the rest of the sector”.

But Mr Clamadieu disputes that idea, in part because Engie remains complex and diversified.

“Who could see us as a target?” he said. “I can’t see people organising a large, very large takeover project” when they only want access to “20 per cent or 25 per cent” of the company’s operations.



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Analysis

Covid paralyses Asia as western economies prepare for blast-off

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Throughout 2020, Asia’s success in controlling Covid-19 made it the champion of the world economy. While Europe and the US were mired in deep recessions, much of Asia escaped with a shallower downturn or even kept growing.

But as western economies gear up for a vaccine-induced rebound which is set to take their output back to its pre-pandemic scale by the end of this year, parts of Asia are still paralysed by coronavirus. As a result, although the region’s output is already above its pre-pandemic level, slower growth is expected in the coming months.

As it launched its new regional outlook last week, the Asian Development Bank said that the region’s economies were diverging and that more Covid-19 waves were a big risk.

“New outbreaks continue, in part due to new variants, and many Asian economies face challenges in procuring and administering vaccines,” said Yasuyuki Sawada, the ADB’s chief economist.

The ADB projected growth of 5.6 per cent across developing Asian economies in 2021, led by growth of 8.1 per cent in China and 11 per cent in India. But the continued threat of coronavirus means risks to that outlook are skewed to the downside.

“Six months ago, or eight months ago, I would have said Asia is going to be ahead of the game because Asia can control Covid,” said Steve Cochrane, chief Apac economist at Moody’s Analytics in Singapore.

But the picture has changed, with India suffering a severe wave of the virus, and cases still high in countries such as Indonesia, the Philippines and Thailand. Thailand is unable to reopen its crucial tourist industry.

More subtly, countries such as Japan are only controlling the virus with restrictions that keep parts of the economy in hibernation. “Some countries need vaccines to control Covid,” said Cochrane. “Others need it so they can open up to international travel and tourism.”

The promise of more than 6 per cent growth in the US this year, as a result of President Joe Biden’s fiscal stimulus, would normally have Asian exporters licking their lips.

Line chart of GDP rebased (2019 = 100) showing Asian economies were less affected by the early stages of the pandemic

The outlook, however, is more subdued than record US growth would usually imply: Americans already bought plenty of goods during the pandemic, while higher US interest rates would mean tighter financial conditions in Asia.

“Adding stimulus at this stage, from the goods perspective, is a real test of whether wants are insatiable,” said Freya Beamish, chief Asia economist at Pantheon Macroeconomics. As the economy opens up, US consumers will probably pay for the services they were denied during lockdown — such as meals out and haircuts — rather than replacing their television again.

There will still be some spillover from the US stimulus, said Beamish, noting that service providers needed equipment, too. “We suspect that people will find new goods to buy and that Asia will benefit from that.” But she added: “We suspect that China will benefit proportionately less from the services recovery than from the manufacturing recovery.”

Whether the extra US demand for goods turns out to be large or small, it is clearly positive. By contrast, higher US interest rates and a stronger dollar would threaten many emerging Asian economies with a repeat of the 2013 “taper tantrum”.

Increased financial integration and foreign currency borrowing mean that the pain of rising US interest rates is quickly felt on the other side of the Pacific.

“A stronger dollar is no longer an unalloyed blessing for Asia,” said Frederic Neumann, co-head of Asia economics at HSBC in Hong Kong. “It helps exports but tightens financial conditions.”

However, inflation is subdued across most of emerging Asia, and the ADB said the risk of a US-induced shock to financial conditions “remains manageable at present”. It said economies such as Sri Lanka and Laos would be vulnerable if such a shock occurred.

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Some Asian economies are well-placed for the next few years, especially Taiwan and South Korea, which are exposed to the semiconductor cycle. “Judging from semiconductor shortages, it doesn’t look like the electronics cycle will break down in the next two or three quarters. That tides them over this rough patch,” said Neumann.

But other Asian economies will find themselves in the less familiar position of relying on domestic demand to grow. One of the biggest question marks is China itself, where first quarter numbers suggest the economy has lost a little momentum.

“Chinese domestic demand still has a way to go,” said Cochrane. “Our forecast right now is for 8 per cent growth in China in 2021, but it depends a lot on policymakers and how quickly they pull back on stimulus and introduce frictions in areas like construction.”



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Analysis

Has Venezuela’s economy bottomed out?

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After one of the biggest economic meltdowns in Latin American history, there are signs that Venezuela may finally be turning a corner.

According to some economists, the socialist government’s decisions to loosen currency controls, relax import restrictions and encourage informal dollarisation have breathed a modicum of life into an economy that has shrunk by about 75 per cent since 2013.

The change of government in the White House has also raised hopes that a solution might be found to the country’s long-running political stalemate, which might lead to an easing of US sanctions and in turn fuel a further rebound.

Credit Suisse recently predicted the Venezuelan economy would expand by 4 per cent this year, which would be its first year of growth since 2013. The bank acknowledged this was in part due to the resumption of economic activity after last year’s hit from the coronavirus pandemic, but this was “not the whole story”.

“The revival in domestic demand, which we have long been noting, is becoming more apparent in the data,” Alberto Rojas, the bank’s chief economist for Venezuela, wrote in a note to clients.

“The easing of controls and widespread use of foreign currencies in everyday transactions has rekindled economic activity — even if just slightly.”

Rojas forecasts further growth of 3 per cent in 2022. “In our view, the growth this year is not just a dead cat bounce,” he wrote.

In Caracas, people were sceptical that this amounted to any sort of meaningful recovery. According to the IMF, per capita gross domestic product in Venezuela has dropped a staggering 87 per cent over the past decade, from $12,200 a year in 2011 to $1,540 now. For the first time, the average Venezuelan is poorer than the average Haitian.

“When you’ve fallen so low, eventually you’re bound to see some sort of correction,” said Adán Celis, president of Venezuela’s manufacturers’ association Conindustria. “The government has introduced some anarchic measures of economic flexibility and that’s provided us with a little bit of oxygen but the structural problems remain.”

But a handful of other banks and consultancies also expect output to increase. Two Venezuelan consultancies, AGPV and Dinámica Venezuela, predict growth this year of 1.9 per cent and 2.3 per cent respectively.

UK-based Oxford Economics forecasts growth of 0.2 per cent this year followed by a jump of 13.1 per cent next year, although it stresses this recovery needs to be seen in context.

“This follows two years in a row [2019 and 2020] when GDP fell by a third or more,” said Marcos Casarin, OE’s chief Latin American economist. “Given the magnitude of the collapse seen since 2014, Venezuela could grow at double-digit rates for several years in a row and still not recover its pre-crisis GDP level.”

Column chart of GDP change (%) showing Venezuela's economy has been shrinking for years

For every economist predicting growth, there are plenty who say Venezuela will suffer more pain before things finally improve.

FocusEconomics, a provider of economic consensus forecasts, recently polled 21 banks and consultancies for their views on Venezuela. The consensus was for a fall in GDP of 3.1 per cent this year followed by a rebound of 2.7 per cent next year. The IMF predicts a contraction of 10 per cent this year and 5 per cent next.

The huge differences between forecasts reflect uncertainty over the consequences of the pandemic, the impact and timing of the rollout of Covid-19 vaccines and the future of the sanctions regime.

“The evolution of US sanctions under the Biden administration remains the key determinant of the outlook,” wrote Stephen Vogado, economist at FocusEconomics.

The sanctions prohibit Venezuela from selling oil to the US and make it difficult for it to export elsewhere, although the government has found ways to get round the measures. Venezuela’s oil exports have risen slightly in each of the past five months, hitting a 10-month high in March — although they are still feeble compared with historical highs.

While oil has been the mainstay of the Venezuelan economy for the past century, the country also used to produce cacao, coffee and rice in significant quantities. It boasted a textile industry and produced chemicals, cement, steel and aluminium. Most of those industries have been decimated in the past two decades of revolutionary socialist rule.

At an outlet selling car accessories in a petrol station in the Las Mercedes neighbourhood of Caracas, store manager Alfredo Barrera said informal dollarisation had brought some degree of price stability after years of hyperinflation.

“The economy has adapted to the country’s problems,” he said. “Right now, it’s fair to talk about relative stability in terms of the currency but we’re a long way from seeing real improvement.”

At La Alicantina, a bakery that has been in business for more than 30 years, manager Douglas Palencia said sales had been hit hard by the pandemic. The shop’s windows, usually full of cakes and pastries, were empty. “I don’t have great expectations for this year,” he said.



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Sturgeon taps Scottish resentment over Johnson and Brexit

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Kenny Paton, the postman in Dumbarton, has been criss-crossing the west coast town near Glasgow, delivering flyers for all the parties contesting Scotland’s parliamentary elections this Thursday. But he is only listening to one.

For all the shortcomings of the Scottish National party’s 14 years in power, the recent turmoil surrounding its handling of sexual harassment claims against former leader Alex Salmond and the destructive nature of its cherished goal of breaking the 314 year union, the party is on course for victory once again.

That is in large part because the SNP, with first minister Nicola Sturgeon at its helm, has been speaking to the heart, tapping into the deep resentment many Scottish people feel at being ruled from Westminster by Conservatives whose leader Boris Johnson and policies, notably Brexit, they did not vote for.

Dumbarton, Scotland map

For some Scots, the economic arguments against independence — and these have only grown with the sharp deterioration in Scotland’s fiscal position since Brexit and the onset of the coronavirus pandemic — are no longer cutting through. 

“You can get into all the intricacies about the border and the currency but at the end of the day who do you want to run the country Boris Johnson or Nicola Sturgeon?” said Paton, who once supported Labour, but is now rooting for the SNP.

Nicola Sturgeon campaigns in Dumbarton © Jeff J Mitchell/AFP/Getty Images

If opinion polls in the run-up to Thursday’s vote are correct, the party is sure to remain the largest in the devolved Holyrood parliament and will possibly gain the slender majority it wants to continue pressing Westminster, for its second chance in seven years of winning independence in a referendum.

There is also the probability that with the Scottish Green party, and Salmond’s newly launched Alba party, the SNP will form part of a bigger block in favour of Scotland going its own way.

Chart tracking voting intention polls for the constituency vote in the Scottish Parliament election

But to get across the line to an SNP majority, Sturgeon may need to win marginals such as Dumbarton, where Jackie Baillie, the deputy leader of Scottish Labour and a popular constituency MSP is defending a majority of just 109, the most vulnerable in Scotland.

As well as her appeal to Scottish identity, Sturgeon has a number of other things in her favour. One is Labour’s weakness, and the perception that it could be long before the party Scotland once voted for en masse returns to power.

“I have been an advocate for Scottish independence since the Conservatives won a majority in Westminster. They do not reflect our views — Scotland is a progressive place,” said Ross Crawford, a 28-year-old IT consultant. “It will be a while before Labour can collect themselves — that’s what makes it so discouraging. It means yet more Conservative rule,” he said.

Labour’s Jackie Baillie in Dumbarton © Jeremy Sutton-Hibbert/FT

Most of all Sturgeon has Brexit and the indifference shown by first Theresa May, the former prime minister, and then Johnson to the majority in Scotland who voted to remain in the EU and who wanted to retain close relations.

“In 2019, the polls began consistently showing higher levels of support for the SNP. The rise occurs entirely among Remain voters,” said John Curtice, professor of politics at the University of Strathclyde. “Whatever the preferences of Boris Johnson, and Michael Gove [Cabinet Office minister], the brutal reality is that their pursuit of Brexit has undermined support for the union,” he said. 

Julie Reece: ‘We felt safe with her [Nicola Sturgeon] during Covid’ © Jeremy Sutton-Hibbert/FT

For most of last year backing for independence in Scotland polled at 50 per cent or higher when undecided voters are excluded. But while it has slipped back since then, support for Sturgeon in Dumbarton remains high. This has much to do with her more assured performance during the pandemic, which has helped the SNP avoid an awkward reckoning for its less than stellar longer term record in areas such as education and health. 

“We felt safe with her during Covid,” said Julie Reece, a bus company manager and former Labour supporter now backing the SNP.

Like many people strawpolled in the constituency, Reece was unfazed by Sturgeon’s alleged mishandling of sexual harassment claims against her former ally. “They have tried to make her a scapegoat for Alex Salmond’s affairs,” she said, adding, with a nod to how the first minister has brought women like her behind the SNP cause: “She has engaged women better — it switches you on that bit more,” she said.

But the stakes are high and the tightness of the contest is also galvanising Scots who support the union and are passionately against the rupture it would cause. This has led to unlikely alliances in Dumbarton, with some staunch supporters of the Conservative party even promising to vote tactically for Labour — a rare occurrence in UK politics.

Chart tracking voting intention polls for the regional vote in the Scottish Parliament election

“Anything that keeps the SNP out,” said Carl Vickers, who works at the Faslane naval base further up the Clyde estuary, where thousands of jobs could be lost if Scotland breaks away. The SNP opposes the use of Faslane to store the UK’s nuclear deterrent.

Vickers described himself as a Conservative by nature but said he would be voting for Baillie on the day.

“It’s all about stopping them [the SNP] getting another referendum,” said Trish Collins, a headhunter and Tory who was also planning to vote for the Labour candidate in the constituency vote, which the Conservatives have little chance of winning.

In Scotland, members of the parliament in Edinburgh are elected using a hybrid voting system: constituency representatives elected using the first past the post voting system while additional representatives are elected according to the proportion of votes a party secures in a region comprising several constituencies.

On the banks of the river Leven, Baillie herself remained defiant. “My seat on paper should go to the SNP but I am a seasoned campaigner so I am not stopping until polls are closed,” she said.

A pro-Scottish independence rally in Glasgow last Saturday © Jeremy Sutton-Hibbert/FT

“Our number one priority should be recovery and then we can argue about the constitution,” she added, warning that when Westminster pulls the plug on the job protection scheme, there could be a surge in unemployment.

“Brexit has been a mess,” said Baillie. “Leaving the UK could be 10 times worse.” 

That need to focus on recovering from the pandemic — the core of Labour’s campaign — does appear to have resonance, even among some SNP supporters. But for those already convinced about the risks involved in breaking up the UK union, the feelings were even more emphatic.

“We’d just got over one independence vote then Brexit was thrown at us. Now the SNP have got a good chance of coming out with a majority — the whole of Scottish politics is a joke,” said Bryan Burn, a wholesaler for fishing tackle.

He was speaking an hour south by car from Dumbarton in the relatively prosperous town of Ayr, where Conservative MSP and former farmer John Scott is defending another slender majority. A life-long Labour supporter, Burn was visibly distressed at the way things are headed. “If I were younger I would be looking to move elsewhere,” he said.

But Sturgeon is picking up votes in Ayr too.

“I like what she stands for. She’s great at what she does,” said Chris Hughes, a self-employed software engineer, who hoped an independent Scotland could rejoin Europe, and who along with his wife was voting SNP.

Scott, the Conservative incumbent who is defending a majority of just 700 votes, acknowledged that the odds were even. “It will be very, very close,” he said. “The independence issue has become an issue of the heart. Many people don’t take into account the grim realities it might hold for Scotland.”



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