Power Engineering - Suez and GdF agree merger terms

3 September 2007 - The boards of Suez and Gaz de France on Sunday night agreed the terms of their long-awaited merger to create one of the world's largest power groups with an estimated market value of €70bn ($95.5bn), bringing to an end 18 months of political and financial wrangling.

The deal, first announced by the former French government in February 2006 to fend off a potential foreign hostile takeover of Suez, will create the world's fourth biggest power group behind Gazprom, EDF and Eon.

Yet even as the two companies were preparing to launch the deal formally on Monday, some Suez directors expressed strong concerns over the structure that has been hammered out in intense negotiations between the government and the private utility's biggest shareholders and advisers.

Under the deal, Suez has agreed to spin off 65 per cent of its water and waste division in return for merging its energy business with state-owned GdF in a roughly one-for-one share swap. This will leave the state with about 35 per cent of a new energy business that will dominate France's gas market and have a world-beating position in the rapidly growing liquefied natural gas sector.

The company, to be called GdF-Suez, will in turn hold 35 per cent of the environment business. However, Suez's biggest French shareholders have agreed to join in an informal shareholders' pact for up to three years, in effect locking up about 48 per cent of the equity.

Although both boards approved the terms, some of Suez's non-French directors were on Sunday night understood to be concerned at the government's direct and indirect influence on both businesses. "This was not a rubber-stamp meeting," said one person close to the matter.

Politically, the merger is being seen as a coup both for Nicolas Sarkozy, French president, and for France's energy ambitions.

Mr Sarkozy made the spin-off of a majority of the environment business a condition for his approval of the merger - a move that had for several weeks been fiercely resisted by Gérard Mestrallet, Suez chairman.

The spin-off will negate the need to pay a politically controversial special dividend to Suez shareholders to overcome the wide gap in the valuation of two companies that were supposed to merge on a basis of equals.

The impasse appears to have been broken after Mr Sarkozy held direct talks with three of Suez's directors and largest shareholders - Albert Frère, the Belgian billionaire, Anne Lauvergeon, head of the nuclear group Areva, and René Carron, head of Crédit Agricole. Augustin de Romanet, head of Caisses des Dépôts, the state bank, was also involved.

Strategically, the merger will give France two of the world's five biggest energy companies, and link GdF with Belgium's Electrabel, the nuclear power producer and a coveted asset in the European energy landscape.

It was Suez's Electrabel subsidiary that Enel, the Italian utility, wanted when it contemplated a hostile bid for Suez in early 2006.

The Italian threat prompted the previous French government to launch its policy of economic patriotism, and agree the controversial plan to merge GdF with Suez as a protection against a hostile takeover.

GdF insiders are delighted with the outcome. All power sales in France will be branded GdF and the group's chairman, Jean-François Cirelli, is expected to be named successor to Mr Mestrallet.

This could not have been achieved without the intervention of the president, said one GdF insider. "Thank you Mr Sarkozy," he said.

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