GDF, Suez agree new energy merger

Gaz de France and Suez on Monday agreed to create the world’s third-largest listed power and gas company after President Nicolas Sarkozy stepped in to prevent the 18-month old deal from collapsing.

The politically charged “merger of equals”, delayed by disputes over valuation and control, will be on the basis of 21 Gaz de France shares for 22 Suez shares and involves the partial spin-off of Suez’s water and waste-management activities.

The groups unveiled the agreement after talks to solve a financial impasse over an earlier deal brokered by a previous conservative government to prevent a foreign takeover of Suez.

Their boards adopted new merger terms on Sunday after Sarkozy put pressure on Suez to abandon most of its historic water and waste assets and focus on electricity and gas.

Suez chairperson Gerard Mestrallet put a brave face on the decision to float 65% of the environment business despite his earlier public insistence that it was central to Suez.

At a presentation on the deal, he praised Sarkozy’s “industrial vision,” which analysts called the latest example of a hands-on industrial policy by France’s newly elected leader.

After the environment spin-off, the new group is valued at around €78-billion ($107-billion) and will vie with France’s EDF and Germany’s E.ON amid European deregulation.

After long delays caused by political disputes, the deal is expected to be completed in the first half of 2008.

The merger implies the privatisation of Gaz de France, a move strongly opposed by unions and opposition Socialists, with the French state due to hold “more than 35%” in GDF Suez, compared with its current GDF stake of around 80%.

But it also raises concerns among investors over the role to be carried out by the French state, which will have a third of the seats on the GDF-Suez board and a blocking minority stake.

Mestrallet deflected questions on whether Suez, the company that built the Suez Canal, had effectively been nationalised for the third time in its 150 year history.

“For a group like ours ... which needs visibility, the state’s presence at this level will give us visibility and this is a plus,” Mestrallet said.

GDF and Suez saw their shares fall respectively 2,7% at €35,81 and 3,3% to €40,36 as investors locked in profits on the stocks following a rally last week.

Some also expressed concerns over the hand of the state.

“Investors are hardly ever keen on a company with a stake controlled by the state,” said Raimund Saxinger, who helps manage €6-billion in shares at Frankfurt Trust in Frankfurt.

The deal offers Suez shareholders a bump-up of about €4 a share compared with the original plan, Reuters calculates, but this does not fully close a gap in the companies’ share prices. However there could be fine-tuning to the water unit’s value.

Sarkozy’s push

Under the new deal, Suez will divest 65% of its environment activities—which analysts give an enterprise value of €18 to €20-billion—through a stock market listing, which will take place at the same time as the merger.

The water spin-off was needed to slim down Suez to preserve a politically acceptable merger of equals with the smaller GDF, sources close to the talks said.
The 65% environment business stake will be distributed to Suez shareholders.

France’s largest energy union, CGT, said it was trying to rally opposition on a broad front including consumers and accused Sarkozy of abandoning pledges to keep GDF public.

Prime Minister Francois Fillon defended the decision by Sarkozy, who as finance minister in 2005 had vowed not to lower the state’s stake in GDF below 70%.

Suez head Gerard Mestrallet will become chairperson and chief executive of the new group, with GDF chief Jean-Francois Cirelli set to become the new group’s vice-chairperson. The group will be called GDF Suez but its logo will look like one used by Suez.

A union source said Credit Agricole bank and state-owned firms Areva and CDC, which jointly own 8,4% of Suez, would buy further into the environment business, allowing Suez to claim that it and its partners would retain 48% of the water and waste business in total.

Mestrallet promised not to load up the unit with debt, on top of the €5,4-billion it already owes, in a bid to avoid criticism meted out to French media firm Vivendi when it floated off a simliar environment unit with high debt in 2000.

Gaz de France and Suez reaffirmed operational synergies of about €1-billion per year by 2013, including around €400-million by 2010, after taking into account the impact of commitments made to the European Commission.

The companies agreed a year ago to sell stakes in Belgium’s Distrigas and power producer SPE after the Commission expressed concern a merged GDF-Suez could hamper competition in Belgium.

Suez was advised in the deal by BNP Paribas, JP Morgan and Rothschild. Its board was independently advised by HSBC. GDF’s advisers included Société Générale and Merrill Lynch. - Reuters

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