Accounting fraud, low earnings force Veolia to ditch U.S. Marine Services business, among others

PARIS (Dow Jones)–Pointing to a worsening business environment in Italy, North Africa and the U.S. that resulted in a net loss for the half-year and a large impairment, Veolia Environnement SA (VE) Thursday announced a corporate overhaul of the company that includes divestitures and a significant geographic scale-back.

The French waste and water utility, the world’s biggest in terms of revenue, also disclosed accounting fraud in the U.S. that occurred in 2007-2010. The fraud amounted to EUR90 million, but didn’t affect the company’s results for 2011, company officials said.

Veolia shares initially opened slightly up Thursday, but fell sharply soon thereafter and generally trended lower as the day progressed. At 1200 GMT, Veolia shares were trading at 12.60 down EUR1.70 or about 12%.

Analysts said the sharp drop reflected that the group’s earnings missed expectations and fears that it would continue to suffer as its cash-strapped customers press for pricing relief. Bank of America Merrill Lynch said the financials pointed to “worrying” trends and that confidence in the group would not be easy to restore. Other analysts were more hopeful in light of the reorganization unveiled Thursday.

The earnings report follows a profit warning issued by Veolia last Friday in which it announced EUR800 million of asset impairments and lowered its full-year financial guidance due to unspecified problems in the three regions. Veolia shares have dropped nearly 28% since issuing the warning.

Veolia’s earnings came a day after French peer and rival Suez Environnement SA (SEV.FR), announced solid first-half earnings, benefiting from its comparatively narrow geographical presence and range of activities.

Some of the issues are related to financial difficulties encountered by Veolia’s customers, notably in Italy, company officials said.

Veolia said it plans to exit activities in Egypt and Morocco and the Marine Services business in the U.S., while it reviews its business in Italy. It will also reduce its global presence to 40 countries from 77 currently.

“We will be smaller in one year time but we will be more profitable also,” said Chief Executive Antoine Frerot.

Veolia will also press ahead with cost-cutting efforts and will reorganize its senior leadership, reassigning environmental services chief Denis Gasquet to lead a reorganization to improve operations.

Veolia said it would maintain a “high” dividend payout “as a percentage of adjusted net income,” but couldn’t confirm that the level would match this year’s.

Veolia said it unearthed the U.S. accounting fraud during the second quarter, but that the incidents didn’t play a role in the six-month results. The accounting fraud took place in the company’s U.S. Marine services business and amounted to EUR90 million in total over 2007-2010 due to results that had been inflated, said Chief Financial Officer Pierre-Antoine Riolacci.

The Marine Services unit offers offshore oil and gas and inland marine maintenance and was badly hit after BP PLC’s (BP.LN) oil spill in the Gulf of Mexico last year.

Riolacci said the company employees involved in the fraud left Veolia in May, adding that the accounting fraud didn’t represent a systemic risk for the group and that no money had been stolen from the group. Veolia plans to notify the U.S. Securities and Exchange Commission when it files its semi-annual report, a spokeswoman for Veolia said.

– By Geraldine Amiel, Dow Jones Newswires

Pictured: The Viking Poseidon, part of Veolia ES’ fleet operating in the U.S. GOM