Global Insight Perspective | |
Significance | Board agreement on the final merger terms paves the way for the creation of a new energy group with a market capitalisation of 90 billion euro and a leading position in French, Belgian and European energy markets. |
Implications | The agreed terms will see Suez spin off a majority stake in its environmental business, allowing the companies to merge in a roughly one-for-one share swap. |
Outlook | Shareholders at both companies have yet to vote on the deal, but, with the key players lined up, the parties can be confident of finalising the long-awaited merger within their stated timeframe of mid-2008. |
A New European Leader
Gaz de France (GdF) and Suez today announced that their boards have agreed to merge the companies in a move that will create a new European energy giant. The agreement draws to a close an 18-month negotiation process that has seen fierce parliamentary debate, legal wrangling, union opposition, public protests and close scrutiny by the European Commission. The direct involvement of French president Nicolas Sarkozy in the final negotiation process is a further indication of the political and strategic significance of the merger, one of the largest to take place so far in the recent flurry of consolidation activity that has characterised Europe's energy markets.
The merger will create a leading global energy player with a market capitalisation of 90 billion euro (US$123 billion) and revenues of 72 billion euro. The new company, to be known as GdF Suez, will be the number one buyer and seller of gas in Europe, the number one importer of LNG in Europe, the second-largest French and fifth-largest European power producer, the largest gas transmission and distribution system operator in Europe, the second-largest gas storage and LNG terminal operator in Europe, and will also hold significant positions in energy markets in the United States, Brazil and the Middle East. The companies indicated that the merger is expected to produce synergies equivalent to at least 1 billion euro per year.
The Negotiations
Despite the apparent advantages of the proposed tie-up, negotiations to finalise the deal had stalled recently and right up until last week doubts remained over whether agreement would be achieved (see Related Articles). In particular, French president Nicolas Sarkozy remained non-committal on the deal, at various points expressing interest in alternative futures for state-owned GdF, including a possible tie-up with Algerian gas producer Sonatrach. However, it is now clear that Sarkozy's preference had shifted in favour of a merger with Suez, and ultimately the president played a central role in seeing the final merger terms hammered out.
The key hurdle in recent weeks has been the growing valuation difference between the two companies, with Suez's share price surpassing that of GdF since the initial merger terms were struck. The French government was reluctant to make a politically unpalatable special dividend payment to Suez shareholders, while Suez had resisted proposals to offload its environmental division to bring its market value in line with that of GdF. The stand-off was reportedly broken when Sarkozy called talks with three of Suez's directors and largest shareholders last week: Belgian billionaire Albert Frère, Anne Lauvergeon, head of the nuclear group Areva, and René Carron, head of Crédit Agricole. A final call late last week from Sarkozy for Suez to "specialise in energy" in order to see the merger through appears to have been enough to prompt Suez to back down on the sale of its environmental business. The deal brokered has seen Suez agree to spin off 65% of its water and waste division via an initial public offering and merge its energy business, along with the remaining 35% stake in its environmental business, with GdF. The companies will carry out a roughly one-to-one share exchange. The agreement will see the French government left with a 35% interest in the new group.
The final merger terms will be seen as something of a coup for Sarkozy, given that Suez chairman Gérard Mestrallet has appeared staunchly opposed to splitting off the company's environmental business in recent weeks. Indeed, the agreement terms mean that Mestrallet's own proposal tabled last week, which would have seen the French government transfer the shares it holds in Suez via its various state agencies to GdF, was rejected. However, Mestrallet is unlikely to be displeased with the final merger terms either. He has remained one of the strongest supporters of the tie-up, and is set to assume a position as president of GdF Suez, with current GdF head Jean-François Cirelli to be appointed vice-president.
Outlook and Implications
Although Suez's first preference was clearly to retain ownership of its environmental division, the deal reached over the weekend looks to be of benefit to both parties. First and foremost, it has enabled the merger to move beyond the current impasse over the differences in market valuations, a stand-off that had threatened to be, at a minimum, a cause of substantial delay, and, at most, fatal. For GdF the merger will add a significant portfolio of power generation assets, as well as considerable electricity expertise to its business. The electricity sector is a key avenue of market expansion for the company as Europe's newly liberalised energy markets present a growing number of opportunities. For Suez, the considerable purchasing power offered by GdF in the gas market will help the company to gain access to supplies. For France, the new company will create a true "energy champion", large enough to have an influential presence in international energy negotiations and to fend off any unwelcome advances from foreign predators. The enormous resources at the company's disposal will see it well placed to expand its presence across Europe from its strategically located Franco-Belgian base to become a truly regional energy player.
However, the deal is unlikely to be welcomed by all. French Socialist leader François Hollande immediately criticised the agreement, saying that Sarkozy's involvement was in conflict with a promise he made as Finance Minister in 2004 not to privatise GdF. Even within the companies involved some reservations are thought to remain, with a number of Suez directors reportedly harbouring concerns over the level of direct and indirect influence the government is likely to continue to exercise over the new company. However, such opposition now appears to be dwindling. With the required legislation passed, approval from France's Constitutional Court obtained, the European Commission's clearance granted, and the boards of both companies now signing off on the merger terms, the most significant barriers to completing the long-awaited merger have now been overcome. Just final shareholder votes on the deal have yet to be carried out, but with the French government and key shareholders in Suez already expressing support, the two companies can now be confident that the deal will be completed within their stated time-frame of mid-2008.
Related Articles
France: 28 August 2007: Suez Chairman Makes Last-Ditch Offer to French President on GdF Deal
France: 16 July 2006: GdF May be Given Until End-2007 to Examine “Strategic Options” for Future
France: 10 July 2007: GdF-Suez Merger Looking Increasing Unlikely as French President Backs Links with Sonatrach