Veolia Environnement, a global leader in water and waste management, has a little local difficulty: an ailing France-Corsica ferry operator that weighs on its shares, gives its CEO nightmares and puts the brakes on its strategic plans.
At the end of 2012, new Chief Executive Antoine Frerot decided to get out of transport to focus Veolia on its higher-margin water, waste andenergy businesses, and agreed with state-owned Caisse des Depots (CDC) that it would gradually stake over Veolia's stake in their joint venture Transdev, which runs trains, buses and taxis in about 20 countries.
CDC had one condition - that Veolia keep Transdev's 66 percent stake in Societe Nationale Corse Mediterranee (SNCM), a loss-making ferry operator that once had a monopoly on France-Corsica routes.
Frerot had hoped that selling Transdev, which has sales of 7 billion euros and staff of 90,000, would boost Veolia's margins and its valuation, which on a price-to-book basis is only two-thirds of rival Suez Environnement's.
In the expectation of an imminent sale, the company stopped including Transdev figures in its consolidated accounts, which, two and a half years later, have become an exercise in make-believe without the loss-making Transdev, which made up a quarter of group sales two years ago.
The stalemate is not helping Veolia's shares.
"I remain negative on Veolia," said Kepler Cheuvreux equity analyst Xavier Caroen, "notably because the risk on Transdev and SNCM is hard to value and hard to understand."
Caroen said the worst outcome would be if Veolia has to re-integrate Transdev into its accounts, turning the international environmental services group into a more European, multi-industry group, bogged down in a business it does not want to be in.
Avoiding that fate depends on finding a solution for SNCM.
STATE AID CLAIM
Now with a share of just 20 percent of the France-Corsica traffic, SNCM is kept alive by a 96 million euro annual subsidy that it and partner Compagnie Meridionale de Navigation (CMN) receive to keep Franceand Corsica connected.
Despite the aid, and while CMN is profitable, SNCM has racked up cumulative losses of 250 million euros ($341 million).
Selling it was never going to be easy, but Veolia's hopes of finding a buyer were dashed last year when the European Commission ordered France to recover 440 million euros in illegal state aid from SNCM.
Norway's Siem Shipping and Mexico's Baja Ferries have considered buying it, on condition of guarantees that they would not have to repay the aid, which neither the state - which still owns 25 percent of SNCM - or Transdev can give.
Transdev, Veolia and CDC have all said they will put no more money into SNCM, and Veolia no longer wants to take it out of Transdev because of the aid repayment claim.
Veolia CEO Frerot argues that the only way to shield SNCM from the claim is to put it under court protection and continue its viable activities under a new legal structure.
"But we would need clearance from Brussels, so that the fine does not follow," Frerot told Reuters.
An EU official said talks were ongoing but declined comment.
SNCM's unions are fighting this scenario, just as they fought the privatisation process in 2005-2006 that eventually landed the business in the Veolia stable, as they fear jobs would be lost and contract terms downgraded.
The government - grappling with 10 percent unemployment - does not want to be seen putting SNCM's 2,600 jobs at risk and fears the upheaval an SNCM bankruptcy would spark in Marseille, which was the setting for strikes and demonstrations against the privatisation, which culminated in a rocket attack on the offices of the French prefect inCorsica.
"APPLE OF DISCORD"
The SNCM saga has destabilised Veolia's shareholdership and was a factor in a challenge to Frerot's leadership, insiders say.
"SNCM is a permanent apple of discord between CDC and Veolia," said a former Veolia executive.
In February, CDC and Dassault - Veolia's two largest shareholders - pointedly abstained from a vote to renew Frerot's mandate. CDC also said its 8.64 percent Veolia stake was no longer strategic, while Dassault's representatives have resigned from the board.
Attempts to sell SNCM have been further complicated by a revolt by its chairman Gerard Couturier, who voted with the unions on a plan to buy 700 million euros' worth of new ships.
"In the past 20 years, logic has not been the criterion most used in this dossier," Transdev CEO Jean-Marc Janaillac said.
Couturier did not respond to requests for comment.
Two attempts to oust him have failed, and the company will try again at a shareholder meeting in early July.
The unions, furious at Transdev's refusal to buy new ships, have filed a strike notice for June 24.
"They say the survival of the company depends on a summer without strikes, but that means taking staff hostage," CGE-CFE union leader Pierre Maupoint de Vandeul said.
Parliamentarian Arnaud Leroy, a specialist in maritime law, said some confrontation might be good for SNCM, improving its competitiveness with low-cost rival Corsica Ferries, which has captured 60 percent of the traffic.
"There is a small group of people which benefits from the situation and does not want change. But we need to stop living in fear of social conflict in Marseille," he said.
As unions fight receivership, Transdev looks for a buyer, and the government talks to the EU, the 30 million euros the state advanced SNCM at the end of 2013 will soon run out.
A government source said a strike this summer could tip SNCM over the edge. "It's a race against the clock, but time is against us," he said.
(Additional reporting by Jean-Francois Rosnoblet and Cyril Altmeyer; Editing by Will Waterman)