Diva of the Deal

How Enron's high temptress turned massive projects into a $2 billion wet dream for the company -- and an estimated $100 million profit for herself

On the surface, it wasn't a bad idea. Enron had pioneered the gas and electricity trading businesses. It could do the same with water. The water treatment business is energy-intensive. Water engineers point out that about one-third of the cost of moving and treating water is energy-related. Enron viewed itself as the king of the energy business, and therefore, it could get a twofer in the water business. Enron could not only provide the power and the energy risk management tools a water utility might need, it could also run that utility itself, thereby increasing its potential profits.

Furthermore, Enron saw the global water industry as a regulated business that was going to be deregulated and operated by private companies (again, a parallel to gas and power). When that deregulation occurred in countries around the world, Enron wanted to be there, with assets on the ground. Once it owned a big asset such as Wessex or a water utility in another country, it could use its risk management and trading skills to make money by selling water to water-short regions and buying it from water-rich areas. It might also be able to profit by selling lower-cost power from an Enron power plant to the water utility. To do that, it would buy water utilities in target countries. The business plan, known as a roll-up strategy, had worked in such other sectors as trash (like Houston-based Waste Management) and funeral homes (like Houston-based Service Corporation International).

The idea was simple: Azurix would acquire a lot of small companies and then use their cash flow to pay off the debt needed to buy them in the first place. In the process, it would gain economies of scale. But there were problems with the strategy.

Top of the Mark: Rebecca rose through the ranks at warp speed.
Fred Harper
Top of the Mark: Rebecca rose through the ranks at warp speed.
Pipe Dreams author Bryce is a veteran business journalist.
Pipe Dreams author Bryce is a veteran business journalist.

The world's water utilities have few interconnection points, a fact that makes moving and trading water very difficult. In the gas business, pipelines intersect in locations like the Henry Hub or the Katy Hub, where gas from one company can be transferred to another. In the electricity business, large utilities may not share generating plants, but their power lines often have overlapping service territories. That means that utilities can ship or "wheel" power from one location to another over existing power lines, and they can do it almost instantly, at very little cost.

Water's a different story. Unlike gas and power, it's heavy, 8.33 pounds per gallon. That means it's very expensive to move long distances. In addition, water is a highly variable commodity. Gas and power have very little variation. A BTU of gas and a kilowatt of electricity are virtually identical, no matter where they're delivered. Not so with water, which can have wildly divergent characteristics, like taste, salinity and turbidity.

Those characteristics matter. They matter a lot. Water comes freighted with an entirely different political and social sensibility than gas or electricity ever will. Water has religious, nationalist and political overtones in virtually every region of the world. And unlike gas and power, people are not willing to pay high prices for it. Water is viewed as a birthright, not a luxury. And towns, cities and countries are willing to dispatch activists, lawyers and even armies to protect what they view as "their" water. As Mark Twain famously wrote, "whiskey's for drinking, water's for fighting."

Alas, the history of water and its political significance mattered little to Mark and her acolytes at Azurix. Mark made her reputation by moving at warp speed and then accelerating from there. Her focus was on doing deals and more deals, not on thinking about strategic moves or water's sociopolitical significance. Her hurry-up mentality meant Azurix needed to do an initial public offering, and quick. After all, the equity markets were booming. In 1998 alone, American companies raised $36.8 billion from IPOs. Of that amount, more than $2.7 billion was raised in IPOs conducted for nearly four dozen Internet companies. Azurix's idea to take on the world water business was certainly as good as dogfood.com or any of the other digital Ponzi schemes that were attracting millions of dollars of new funding. So they set their IPO for June 9, 1999. And within a few days of going public, Mark's stock options in Azurix were worth about $50 million.

But as any good cook knows, haste makes waste. In the case of Azurix, it led to a decision that arguably sealed the company's fate almost before it was born: Just before the IPO, Azurix paid $438.6 million for the right to provide some two million people in and around Buenos Aires with drinking water. The next-highest bid was about $150 million.

The stupendously high bid was the result of poor planning, poor communication and poor judgment. Shortly after Azurix won the bid for the water utility, the company's lead managers found out that the headquarters building, where the utility had been run for many years, was not included in the deal. The majority of the staff needed to run the utility wasn't included, either. Within days of the Azurix takeover, the company discovered that thousands of billing records from the old utility were lost. That meant that right off the bat, Azurix's revenues in Buenos Aires would be far lower than expected.

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