Veolia To Sell All of Suez’s U.K. Waste Business To Placate U.K. Watchdog, Shares Cheap

No-moat Veolia announced on June 16 that it intends to sell all of Suez's U.K. waste business. After completion of the acquisition of Suez in January, the U.K. was the last market where Veolia did not get the antitrust clearance. The competition and market authority's decision was due by July 17. Given the combined market share of Veolia's and Suez's U.K. waste businesses of more than 30%, it was largely expected that Veolia would have to sell part of Suez's U.K. waste business but not all of it. Veolia claims its drastic move is driven by the intransigence of the Competition and Markets Authority. As Suez's U.K. waste activity was among Suez's assets deemed strategic by Veolia, one might see the sale as a setback. However, given strong interest for these assets and limited impact on synergies, we estimate the disposal could be slightly value-accretive. For now, we reiterate our EUR 34.20 fair value estimate. Shares appear grossly undervalued as investors fret over the impact of the economic slowdown on Veolia. Yet, activities that can be deemed cyclical—that is, commercial and industrial waste—account for only 17% of the firm's turnover. On the other hand, the current environment offers significant tailwinds like positive pricing, thanks to indexation of most contracts to inflation and positive foreign-exchange effects.