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Chandan Dubey
Chandan Dubey
Articles (150) 

Value Idea Contest - GDF Suez (GDFZY)

April 11, 2013 | About:

I must note again that this started as a value idea contest submission, but there are too many risks. The company has a sprawling business across the globe and the management has itchy fingers. They make too many acquisitions and disposals for me to be comfortable. They claim that they are doing this to “remove businesses with low returns” and add “businesses with high returns.” Given that this is a management cliche and I don’t see why their recent International Power acquisition qualifies — I would rather not invest alongside.

I started writing this a few months back when there share price dropped to €14 after a bad quarter. The price has since recovered a bit to €16 but is still far from the 52-week high and has dividend yield of nearly 10%. It goes ex-dividend on April 25 and so I decided to finish the report today.


1 History

2008 Formed after a merger of Gaz de France (created 1946 by French government for producing, selling and distributing gas) and Suez (formed in 1858 to construct the Suez Canal)

2010 Bought 70% of Britain’s International Power

2012 Purchased the rest of International Power to create the world’s largest publicly held utility company

The merger has left the original 80% stake of the French government in GDF to 35% in the shares of the newly formed GDF Suez. The water and waste assets of Suez were spun off into a separate publicly traded company called Suez Environment and GDF Suez holds a 35% stake in the company.


2 Business

The company is active 6 business lines: Energy France, Energy Europe and International, Global Gas and LNG, Infrastructure, Energy Services and Environment. The revenue and operating income breakdown for 2012 is shown in the figure below.


The company has a good mixture of regulated and unregulated businesses. The European business is mostly regulated but the international business is less so. If we look at the revenue and the operating income breakdown, we see that Energy Europe has a 45.8% share in revenue but only 24.6% share in operating income. But the International segment has a 16.5% share in revenue but 28.9% share in operating income.


The margins at GDF Suez have been relatively stable although in the last two years they have been going down, mainly due to impairment losses of the European business. In cases like these I think average margins give a good idea about the profitability of the business. The average net margin for GDF Suez has been around 5% in the last 10 years.


3 Management

If we look at the cash flow situation of GDF Suez (2008 was the year of merger and the negative FCF was mainly because of higher capex), we find that the company has had good free cash flow. On an average GDF, Suez has generated €4.1 billion in FCF since the merger. The management of GDF Suez is a bit hard to gauge given that their track record has been small (since 2008) and quite average. I like the fact that they have not acquired many companies except International Power and have refused to sell their 35% holding in Suez Environment.


It is important to point out that Groupe Bruxelles Lambert (GBL) owns nearly 5.2% of the shares outstanding and has directors on the board. I have great respect for Albert Frere who is the CEO of GBL.


Following is the share ownership summary of GDF Suez. Nearly 36% is owned by the French government followed by 5.2% of GBL.


The company pays a good dividend and the dividend has grown year after year. In terms of policy the only relevant note I could find was that the “the board commits to an attractive dividend policy." The dividend can be obtained in cash or in shares. In 2012, the conversion rate was €16.43 per share. At the current share price, the dividend yield is near 10% and even with 21% French withholding tax, it is quite attractive.

Following is the share count of GDF Suez. We are only interested in the figure after 2008, and the share count there has moved upward by a tiny bit (84 million on 2 billion shares in 2009).


5 Financial Strength

GDF has €45.2 billion in LT debt, €12 billion in short-term borrowings and only €11.4 billion in cash.

GDF has A-rated debt and pays only 4.2% interest. Still it had to pay interest of €2 billion in 2012. Following is the split of the debt according to the vehicle. Nearly 78% of its debt is fixed rate. So, a change in interest rates will not have a huge effect on GDF’s interest expenses.


Since the merger, the debt has been going up. GDF has sold a lot of its assets to readjust its portfolio from a low return on investment business to high return. The recent International Power acquisition has also had a bad effect on the balance sheet.


Historically, the debt vs. equity has remained around 0.5 for GDF. GDF also carries goodwill of nearly €30 billion on its balance sheet.l02ab2akPLeoNJOOw2LZEjfN6Gi7aTNO67qFaB71

The debt profile of GDF is quite bovine. Most of their debt is due after 2017.


6 Risk

The company is in a capital-intensive business. It regularly, for the last four years, has had capital expenditure of nearly €10 billion, i.e. 10% of its revenue and two times its net income.

The company operates in a regulated industry. Most of its European business is regulated. It offers a good set of unregulated businesses outside Europe, but the risk of regulation is ever present. If regulated, the margins will suffer and the company will see less return on its investments.

The home country of GDF is France. France does not have a good reputation as a competitive market in terms of labor. The unions are very strong and the company’s pay the price. GDF carries nearly €6 billion in post employment liability.

GDF has a huge interest expense. In 2012, it was nearly €2 billion, which is comfortably covered by €17 billion in EBITDA but is huge compared to the net income of €2.7 billion.

GDF has a huge array of businesses in the utility sector and they keep making changes in the portfolio. The acquisitions and disposals are numerous. With so much excitement, there are bound to be errors. Following is the list of changes it made in 2012.


7 Valuation

The Enterprise Value of GDF Suez is €33.4 billion + €54 billion = € 88 billion.

The company has revenues of €97 billion, OCF of €13.8 billion and FCF of €4.4 billion. It is not very cheap according to these numbers. Historically, it is very cheap and is selling for 0.5 times its book value.

Given the dividend yield of 10.2% which is on an average 50% of the net income, one might call it quite cheap. The trouble is that the dividend is not stable and has already been cut since 2008. There was no increase in 2012 either. So, it does not qualify as a dividend growth stock. But 10% dividend is pretty huge payment. Even if GDF manages to keep the current profitability and pay 50% of its net income then the dividend is expected to be greater than 5% after withholding taxes.

Bottom line: Cheap but has a lot of risk. The management buys and sells businesses like chips and errors can come back to haunt them. With so much going on
the risk of something bad happening is high. The company also has a huge debt load and interest expense.

Additional disclosure: I do not hold shares. Data is taken from Morningstar.com, and the GDF website. Graphs have been made by GuruFocus.com and Google spreadsheet tools.

About the author:

Chandan Dubey
I invest because I want to be free by the time I reach 40 years of age i.e., 2025. My investment style is to find a small number of bets with large margins of safety. I pay a lot of attention to management and their incentive. Ideally, I like to buy owner operator businesses. I am fortunate to have a strong inclination towards studying. I aid my financial understanding by extensive reading in psychology, economic, social sciences etc.

Rating: 3.8/5 (8 votes)


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