France sealed the creation of one of the world's largest energy groups, brokering an €90 billion merger of the state-owned natural gas company Gaz de France with the energy business of the private utility Suez. The combined business will be called GDF-Suez and boast sales of €72 billion. The French state will be its main shareholder with a blocking minority stake of more than 35 percent. The companies announced the deal Monday after hammering out final details over the weekend.
Under pressure from President Nicolas Sarkozy of France, who had publicly urged the creation of a strategic entity focused on energy, the deal was clinched Sunday. Suez agreed to spin off its water and waste business, known as Suez Environnement. The company will issue separate shares in the unit and distribute two-thirds of them to shareholders before merging its energy operations with Gaz de France by way of a pro rata share swap.
The spin-off of the environment division is expected to be completed by the end of the year, and the merger will probably take place "as early as possible in 2008," according to a joint statement by the two companies.
The new group will be worth about €90 billion, or $122 billion, the companies said, although the exact figure will depend on the price at which shares of the Suez water and waste division will be valued when they are floated.
The deal, one of the biggest in the politically sensitive energy sector, is likely to focus the minds of rivals at a time when all of Europe is scrambling to shore up energy security and avoid growing too dependent on Russian natural gas reserves. France is already home to the world's second-largest listed utility after Gazprom, Électricité de France. The country will now have a another global player with GDF-Suez, which could become No. 3, analysts say.
The companies said in their statement that "recent developments in the energy sector reinforced the strategic and industrial logic behind the transaction."
The agreement is also a victory for Sarkozy, who has long been an unapologetic defender of the state's role in fostering national champions in strategic industries. It was a tricky negotiation for the president, who as finance minister in 2004 had promised not to privatize Gaz de France; the merger reduces the state's stake in Gaz de France from 80 percent to a third and has fueled angry opposition from labor unions.
On Sunday, Sarkozy's office sought to pre-empt further criticism by emphasizing that the state would retain the "power" to influence the running of the company. "It's a privatization in which the state is the biggest shareholder by far," Claude Guéant, Sarkozy's chief of staff, said on French radio.
The agreement brings to an end 18 months of stop-and-go negotiations. In February 2006, the previous French administration had hastily announced a merger to undermine a possible hostile takeover bid from the Italian power company Enel. But in recent months an agreement looked increasingly unlikely. In addition to vocal opposition from labor unions, a widening gap in the two companies' market value complicated things by potentially diluting the state's stake below the legal floor of 34 percent
The decision of Suez to yield to government demands and divest its environment division helped clinch the deal by reducing the valuation gap. Suez shareholders will receive 21 Gaz de France shares for 22 Suez shares.
The Suez chief executive, Gérard Mestrallet, had long ruled out a sale of Suez Environment but agreed to a compromise that allows the merged group to retain a 35 percent blocking minority stake in the spun off unit. In France, a blocking minority requires a 33.3 percent stake in a company.
In line with the initial merger plan, GDF-Suez will be headed by Mestrallet, with Jean-François Cirelli, the chief executive of Gaz de France, second in command.
Labor unions fear that the spun-off water and environment business may now become the target of a hostile takeover bid, which could cost jobs.
Suez Environment may indeed become an interesting buying opportunity for a number of companies, analysts say. They have cited companies like JCDecaux, Vinci and Wendel as possible bidders. Last Thursday, Henri Proglio, the chief executive of Veolia, a rival of Suez, publicly expressed interest in the company's international water and waste operations.
Via: International Herald Tribune
by Katrin Bennhold
