Bold, not bullish

Almost exactly a year ago, rating's agency Standard & Poor's had some bad news for Paris-listed investment group Wendel Investissement. The firm, boasting a long and proud heritage dating back to its birth as a steel company in 1704, learnt that its credit rating had been reduced to junk status. S&P stated that “exceptionally challenging financial market conditions” had weakened Wendel's financial profile “beyond what is tolerable for an investment-grade rating”.

Fast forward to October 2nd 2009 and sitting before me in the Traders Room in Threadneedles hotel in the heart of the City of London is Frédéric Lemoine, who took over as chief executive of Wendel six months prior. Imposing yet genial and relaxed, he proceeds to explain methodically his reasons for cautious optimism in the firm's future.

For my part, I find it hard not to be distracted by a large picture of a charging bull which forms the backdrop to our conversation. There's a strange incongruity about it. Lemoine's thoughtful, measured analysis of his firm's strengths and weaknesses together with his qualified optimism for the future hardly qualify as bullishness. The picture is, however, an apt reminder of the mood in the financial markets before sub-prime contagion spread and the world temporarily lost its bearings.

Maybe all investment firms (or at least those which had the largest pools of capital to invest) can look back on a “height of the market” moment when the bulls were rampant – for Wendel, it was an investment in construction materials giant Saint Gobain. Previously known as a conservative investor, Wendel became notably more aggressive in its dealings with Saint Gobain. By pushing for greater board representation and voting rights as it steadily built up its stake in the firm, Wendel surprised observers and led the target to issue statements that betrayed its annoyance. By late 2007, Wendel had raised its stake to 21.5 percent – having spent a reported €5.5 billion altogether on Saint Gobain shares up to that point. It was now regularly referred to in media reports as an “activist” investor – not a tag likely to be viewed favourably in French corporate boardrooms.

Wendel was not the only French investment group at the time challenging the traditional cosiness of the French corporate world, where cross-shareholdings and shared educational backgrounds typically help ensure that strategic moves are more consensual in nature than in Anglo Saxon markets. It could be argued, therefore, that the Saint Gobain deal was not just potentially transformational for Wendel but also for the French corporate landscape as a whole – a successful outcome in this and other deals of a similar ilk may perhaps have encouraged more widespread activism in future.

WEAK FOUNDATIONS
As it turned out, Wendel concluded its stake-building prior to the worst financial and economic collapse since the Great Depression and a concomitant slump in the construction market. In announcing its results for the first half of 2009, Wendel booked a €705 million impairment loss and a €742 million dilution loss on its Saint Gobain stake as it posted an overall net loss during the period of more than €900 million.

Angered by Saint Gobain's performance and the new strategic approach that it had embodied, members of the Wendel family – which owns a 36 percent stake in the holding company, Wendel Group – strongly criticised the board of directors. Chief executive Jean-Bernard Lafonta, in response to the pressure, fell on his sword in March this year. Lemoine, who had joined Wendel as a non-executive director in mid-2008, stepped – somewhat shell-shocked – into his shoes. “I knew Wendel, I knew how it was run, and so my appointment was quite logical,” he reflects. “But I was not prepared, and could not have foreseen, that I would end up as CEO.”

Lemoine's familiarity with Wendel dates back to the five years he spent at French consultancy Capgemini from 1997 to 2002, where he became deputy chief executive and financial director. Compagnie Générale d'Industrie et de Participations (CGIP), the predecessor of Wendel, was a major shareholder at Capgemini during transformational times for the firm, which included attracting an $835 million investment from Cisco Systems and the acquisition of Ernst & Young Consulting – both in 2000.

During this period at Capgemini, Lemoine says, he developed a close working relationship with CGIP's chairman (now Wendel chairman) Ernest-Antoine Seillière. After leaving the firm in 2002, Lemoine took on a variety of business and political roles. From 2002 to 2004, he was a key economic adviser to then-President Jacques Chirac as deputy general secretary of the French Presidency. His most recent industry role was chairman of the supervisory board at Areva, the French nuclear power company, from 2005 until the Seilliere/Lemoine partnership was revived at Wendel in April 2009.

Lemoine says his latest move was not an easy decision. “It was difficult to leave Areva,” he says. “There was a lot still to be done there – massive investment to be made in the nuclear renaissance.” But he was lured by the sunny uplands he could see beyond Wendel's tumbling share price, which had fallen 73 percent between March 2008 and March 2009 (compared with a 38 percent fall in France's CAC 40 index over the same period).

“I knew from my position on the board that the share price decline could be reversed because of the company's solid financial situation and the quality of the assets. In a downturn you have to be confident in the quality of assets because you have to convince banks and shareholders that you can take advantage of the crisis and consolidate industries. We're well placed in that respect because it's always been the Wendel way to invest in industry leaders – never in difficult situations.”

“In a downturn you have to be confident in the quality of assets because you have to convince banks and shareholders that you can take advantage of the crisis and consolidate industries”

Lemoine is convinced that Saint Gobain will prove itself a good investment. “I believe there is extraordinary potential,” he insists. “An analysis was done on its future growth and profits and I believe that analysis was absolutely correct.”

Crucial to understanding why Lemoine retains faith in portfolio companies most exposed to the downturn lies in a) Wendel's tendency to hold investments for the long term, which gives it the capacity to weather cyclical storms, and b) its portfolio companies' typically broad geographic spread, with many having substantial exposure to emerging markets.

Take Bureau Veritas, a compliance and certification services provider, as an example. Wendel acquired its initial stake in the firm, which has operations in 140 different countries, way back in January 1995. This long hold period does not imply anything sinister – Bureau Veritas has been one of the star performers in the portfolio, with sales growth up 11 percent and operating income up 19 percent in the first half of this year. Nor is it even Wendel's longest investment. Excluding a 1908 investment in energy firm Oranje Nassau – which might be best described as an outlier in this respect – that accolade belongs to allergy immunotherapy firm Stallergenes, in which Wendel began building a stake in 1993. It, too, has been delivering good results.

Lemoine divides up Wendel's portfolio into three distinct segments. There are the “non-cyclical” businesses such as Bureau Veritas and Stallergenes, which are “still growing nicely”. Lemoine says these companies have high barriers to entry and are operating in growth areas. Healthcare has remained generally buoyant throughout the crisis, while Bureau Veritas has benefitted from what Lemoine describes as a “new aversion to risk”. He adds that the latter company “is in good shape in emerging markets because of the need for regulation to ensure that goods for export are accepted around the world”.

Healthcare has remained generally buoyant throughout the crisis, while Bureau Veritas has benefitted from what Lemoine describes as a “new aversion to risk”

Then there are the “more cyclical” businesses, which are often sub-contractors reliant on sectors that have been badly hit by the crisis. In this category he includes the likes of US-based Deutsch, a designer and manufacturer of high-performance connectors (used by, for example, the aerospace and automotive sectors) and Stahl, a Netherlands-headquartered maker of niche coatings and leather finishing products for use in market segments including automotive, furniture and shoes. Wendel's response to the difficulties has included discussions with lenders – for example, to put in place new covenants – and cost reduction programmes.

Lemoine believes the outlook for companies in this category is turning from grim to encouraging. Stahl saw sales and operating income tumbling in the first half of 2009 compared with a year prior. “Destocking had affected revenues badly,” he says, “but now things are getting better and better.”

The final category is construction, where Wendel has taken three big bets. In addition to Saint Gobain, the firm in 2002 teamed with US investment giant Kohlberg Kravis Roberts for the near-€5 billion acquisition of Legrand, a maker of electrical equipment (including areas such as home automation); and bought Materis, a speciality chemicals provider for the construction industry, in 2006. Lemoine points out that within these businesses are units not focused on construction and which are performing well, such as Saint Gobain's glass packaging division.

He adds that “all the efforts we have put into cost reduction will be fruitful in the end”. Furthermore, he sees growth opportunities in markets such as Brazil, China and India. “Legrand and Saint Gobain are growing year on year in these countries and we want all our companies to invest massively there.”

In its half-year 2009 report, Wendel provided challenges to any sceptical view of the construction industry's prospects at a global level. Its long-term outlook for developing countries highlighted: rapid demographic growth; growing urbanisation and industrialisation; improvement in living standards; and access to credit. Meanwhile, positive trends cited in industrialised countries were: lifestyle changes (merged families, stay-at-home elderly, second homes); first-time home buyers; and government stimulus measures to support housing.

WENDEL: THE PORTFOLIO