It may have taken over 820 days, but on 22 July Europe’s newest utility GDF Suez was finally born, after what can justifiably be described as one of the most painful births in corporate merger and acquisition history.
However, GDF Suez immediately assumes a commanding position in an industry where size does matter. It is Europe’s second biggest producer of electricity, after E.ON, and thus ahead of its compatriot EDF. It is also the largest European gas transport and distribution group, and a world leader in the liquefied natural gas market.
Gerard Mestrallet, former chairman of Suez and now chairman of the combined entity, described the deal to create GDF Suez as “one of the largest mergers in France in the last 20 years”.
When shareholders in GDF and Suez gave their approval for the merger in mid-July, this marked the closure of a chapter opened by the French government back in February 2006 when it sought to thwart a hostile bid for Suez by Italian utility giant, Enel. The government was so keen to avoid a French company being taken over by a foreign company, that the former prime minister, Dominique de Villepin actually appeared on national television to announce the merger of state-controlled GDF with Suez, a private utility.
This then led to two-and-a-half years of dispute over the proposed merger, including Rome accusing Paris of “economic patriotism” and the French unions accusing the government of “treason” for abandoning its pledge to never privatize GDF. Unsurprisingly, the European Commission was drawn into the fray but, after its competition authorities conducted an in-depth investigation, it duly gave its stamp of approval.
However, times have changed since then and some may say that the GDF Suez merger comes at a potentially awkward time for Brussels, with its so-called ‘third energy liberalization package’, which calls for increased cross-border competition in the European Union’s electricity and gas sectors. The Commission, however, is keen to downplay the fears that the merger could lead to anti-competitive behaviour. According to a EU spokesman, there is “no reason to believe” that GDF Suez will contravene their legal obligations.
At this point it is worth noting that France has succeeded, where Spain failed, i.e. in creating a national energy champion. It does make one wonder whether this leaves the Spanish government feeling rather hard done by, as it fell foul of the Commission because of its conduct over E.ON’s efforts to acquire Endesa.
GDF Suez, which is listed on global stock markets as the world’s third largest gas and power provider, has consolidated annual sales well in excess of €70bn ($109bn) and a market value of between €90-100bn, which puts it ahead of E.ON in terms of value. There is little doubt that the new GDF Suez will be a force to reckoned with in the global utility arena.
According to the financial press, its balance sheet is in solid shape too and Deutsche Bank has estimated that the group will generate €20bn of net free cash flow by 2011. However fears have been raised that it could embark on a value-destroying spending spree. Mestrallet has attempted to allay these fears, but just as we were going to press Reuters reported that GDF Suez had approached Spanish gas company Gas Natural to launch a joint bid for Union Fenosa. The report went on to say that if Gas Natural declines the offer, the French group would be prepared to make a solo bid for Spain’s third largest utility.
If the latter happens and GDF Suez does decide to go it alone, let’s hope it does not turn into something akin to the E.ON/Endesa/Enel debacle, especially considering what GDF and Suez have gone through achieve their merger.