French GDF, Suez Agree to Power Merger

Gaz de France and Suez on Monday cleared the way to create the world's third-largest electricity and gas company after their boards approved the revised terms of a politically charged merger.

The "merger of equals," first drawn up 18 months ago but 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 spin-off of Suez's water and waste-management activities.

Excluding the environment business, the new GDF Suez is valued at around 78 billion euros ($107 billion), making it the third-largest power utility after France's EDF and Germany's E.ON.

The groups announced their agreement in a joint statement after a weekend of intense discussions to solve a financial impasse that threatened to torpedo the deal.

Their boards met late on Sunday to approve terms hammered out in government offices after French President Nicolas Sarkozy put pressure on Suez to abandon most of its historic water and waste-management assets and focus on electricity and gas.

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

GDF and Suez saw their shares fall 4% each to 35.20 euros and 40.12 euros respectively by as investors locked in profits on the stocks, which rallied more than 8% last week, traders said.

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 have said. The 65% environment business stake will be distributed to Suez shareholders.

Analysts said there was scope for savings for both companies. "There's clearly a lot of overlapping in Belgium and France," Marc Watton, from BNP Paribas, told CNBC. "They are going to be big in upstream gas and downstream electricity in Europe."

Formation of GDF Suez will be completed as early as possible in 2008, the companies said.

The merger implies the privatization 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%.

Sarkozy's Push

France's largest energy union, CGT, said it was making contact with other unions and consumer groups about a strategy to oppose the merger, and said striking was one option.

Gaz de France and Suez will hold a news conference at 1:30 pm London time. Suez head Gerard Mestrallet will become chairman and chief executive of the new group, with GDF chief Jean-Francois Cirelli set to become the new group's vice-chairman.

The deal is a new version of a plan announced by former Prime Minister Dominique de Villepin in early 2006 to prevent a foreign takeover of Suez, while beefing up GDF's power assets.

Sarkozy, elected in May on a program of economic reforms and an advocate of a hands-on industrial policy, held meetings on Saturday to smooth a deal but failed to impress unions who accused him of abandoning earlier 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%.

"Through this deal, France is acquiring a second energy giant ... This is a considerable advantage, which will allow us to structure the European energy market and be a major player on this market," Fillon told Europe 1 radio.

Environment Valuation

The companies said Suez Environnement had 2006 earnings before interest, tax, depreciation and amortization (EBITDA) of 2 billion euros.

Rival water and waste-management rival Veolia has a market value that is 5.55 times 2006 EBITDA. On that multiple, Suez Environnement's market value would be 11.1 billion euros.

Veolia shares trade at 0.787 times 2006 revenues so the market value of Suez's water and waste arm -- based on the Veolia multiple, and Suez Environnement's 2006 sales of 11.4 billion euros -- would be 8.97 billion euros.

The current difference in the market value of Suez and Gaz de France -- taking account of the merger exchange ratio and the part of Suez Environnement going to Suez shareholders -- indicates an underlying market value for the water unit of 12.5 billion euros, according to Reuters calculations.

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.

Gaz de France and Suez confirmed they expected operational synergies of about 1 billion euros per year by 2013, including around 400 million euros 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.

Britain's Centrica said on Monday it hoped to buy the 25.5% stake that GDF holds in SPE.