New European Energy Giant Emerges as Suez, GdF Shareholders Back Tie-Up

The Vote

The long-running process to merge GdF, the former French gas monopoly, and Suez, the Franco-Belgian energy and environmental utility, has attracted its fair share of opposition. However, yesterday, company shareholders left no doubt over their views of the merits of the proposal. In two near-unanimous votes, GdF and Suez investors voted in favour of the merger, overcoming the final hurdle in the process, and putting the new firm, to be known as GdF Suez, on track for launch on 22 July.

Yesterday morning, more than 99% of Suez shareholders gave their backing to the deal, having received a last-minute incentive in the form of a promised special dividend payment once the new company is formed. The overwhelming support is a testament to the fair terms of the deal, which were struck in September last year following intervention by French President Nicolas Sarkozy. The deal will see Suez's water and environmental division, Suez Environnement, split off into an independent unit with existing Suez shareholders to take 65% of the capital in the new entity and the remaining 35% to be owned by GdF Suez. Suez shareholders will then trade 22 of their shares for 21 in GdF, to reflect the remaining valuation difference between the groups.

Hours after the Suez meeting, GdF shareholders came together to hold their own vote, although with the government holding a 79.8% stake in the company, there was never any doubt over the outcome. In the end, over 99% of GdF shareholders voted in favour of the tie-up. In the wake of the decisions, the leaders of GdF and Suez both reflected on the significance of the move, with Suez chief executive Gerard Mestrallet calling it a "historic decision and the realisation of a dream". GdF chairman Jean-Fancois Cirelli similarly praised the deal, saying it is in line with Europe's need for "strong energy companies" to achieve energy security.

A Long Road to Union

The votes represented the final stages of a two-and-a-half year process, which was triggered when Italy's Enel expressed an initial interest in acquiring Suez in February 2006 (see table—GdF Suez: The Timeline). The threat of losing substantial assets in the strategically important energy sector to foreign ownership prompted the French government to seek out its own domestic solution, with GdF the obvious alternative partner. However, the plans attracted considerable opposition, not least from France's powerful public sector unions, which were wary over the effective privatisation of GdF and its impact on job security.

Parliamentary opposition was also strong, with left-wing opponents attempting to filibuster the legislative process by submitting over 130,000 amendments to the GdF privatisation bill. Nevertheless, parliamentary support was secured and the process looked like it was approaching completion until a constitutional court ruling in November 2007 pushed back the merger until 1 July 2007, a decision that would delay confirmation of the deal until after the French presidential election in May, again throwing the plans into uncertainty.

This uncertainty only grew as leading presidential candidate Nicolas Sarkozy began airing his reservations over the deal, speculating that an alternative tie-up for GdF with a major gas producer such as Algeria's Sonatrach may bring greater benefits for the nation. Ultimately, however, following his election Sarkozy proved a key catalyst in determining the final terms of the deal, brokering the agreement in September for Suez's environmental division to be split off, and putting the merger on track for its final run of regulatory and shareholder approvals. Last-minute delay tactics from GdF works councils caused further frustration, but the councils finally delivered their opinions in May this year, paving the way for yesterday's shareholder votes.

GdF-Suez

GdF Suez will formally be created on 22 July. The company will have a market capitalisation of 93 billion euro (US$148 billion), placing it at around the same size as German energy giant E.ON, although still behind French power group and the world's largest nuclear operator Electricité de France. The company will have combined annual sales of 74 billion euro, earnings before interest, tax, depreciation, and amortisation (EBITDA) of 13 billion euro, debt of 16 billion euro, and around 200,000 employees. Current Suez chief Mestrallet will be the company's chairman and chief executive, while GdF's Cirelli will become vice-chairman and president.

Outlook and Implications

The overwhelming support of both GdF and Suez shares is reflective of the considerable value that investors clearly perceive can be extracted from this merger. For one, the sheer size of the new company will assuage any remaining concerns over hostile takeover from foreign interests. Furthermore, as Cirelli himself pointed out, the deal could also bring energy security benefits—for France at least and potentially also for Europe—with the financial grunt of this new player to make a significant contribution to necessary infrastructure investments over the coming decades, and its combined purchasing power sure to prove advantageous in negotiations with key regional suppliers, including Russia's Gazprom and Algeria's Sonatrach.

GdF and Suez have indicated that they foresee operational synergies as reaching 1 billion euro per year by 2013. Leveraging these benefits and achieving the amalgamation of the companies structures will be the near-term focus for the management of GdF Suez as they get this new energy giant up and running. Still, the company is already beginning to look ahead to its medium-term goals. It has established a target to raise EBITDA to 17 billion euro by 2010, a 30% increase on 2007 levels, and has also begun eyeing opportunities for expansion across Europe. Mestrallet indicated yesterday that the company will focus on industrial investments rather than further acquisitions, including boosting gas-storage capacity and gaining a strong foothold in France's power sector. Indications are that Europe's rejuvenating nuclear sector could also be a key focus, with Suez having signalled previously its interest in constructing third-generation reactors. The company will decide next year whether to pursue new nuclear investments, but a strong opportunity looks to be present following the French government's announcement of plans for a second new nuclear power plant, a project that would surely prove the ideal base from which to launch a wider assault on new nuclear investments Europe-wide.