GDF, Suez unveil government-backed merger to fend off Enel

Monday, February 27th 2006, 9:19 am

By: News On 6

PARIS (AP) _ Gaz de France SA and Suez SA announced details Monday of their hastily arranged all-French merger, designed to create a new leading player in energy and environmental services _ and fend off a bid for Suez by Italian power company Enel.

With a combined market capitalization of about euro72 billion (US$86 billion), the new entity would be one of the world's largest utilities companies.

The government-backed deal, which entails the privatization of state-controlled GDF, also answers growing French concerns about security of energy supplies, both companies said.

Under terms hammered out over a heavy working weekend for the bankers, Suez will pay out a euro1 (US$1.19) special dividend to existing shareholders, worth euro1.25 billion (US$1.49 billion) in total. Suez shareholders will then be offered one new GDF share for each Suez share.

The plan was first announced by French Prime Minister Dominique de Villepin on Saturday, three days after Italy's largest power company, Enel SpA, confirmed its interest in Electrabel, Suez's Belgian power unit.

Italian Foreign Minister Gianfranco Fini fiercely criticized France on Monday for what he called a ``protectionist'' move that contradicts the ``values and rules of the free European market.'' A scheduled Monday visit to Paris by Industry Minister Claudio Scajola was canceled.

The legal structure of the deal _ in which state-controlled GDF would buy the much larger Suez _ offers a fig leaf to the French government as it embarks on GDF's politically sensitive privatization.

Finance Minister Thierry Breton, speaking on RTL radio Monday, stressed that the tie-up consists of the ``absorption of the entirety of Suez by Gaz de France.''

GDF shares were down 1 percent at euro29.51 (US$35.11) in Paris trading. Shares in Suez, which had risen 12.2 percent since Enel announced its interest in the company, fell 5.3 percent to euro32.08 (US$38.16)

The new group is likely to be headed by Suez Chairman and CEO Gerard Mestrallet, with GDF boss Jean-Francois Cirelli as his No. 2, according to French newspapers including financial daily Les Echos, which did not cite sources.

The government is going back on a promise it made to maintain control of GDF when it floated 20 percent of the company last year, against heavy trade-union opposition.

Breton began talks with senior union officials Monday in an attempt to answer their objections to the merger, which would leave the French state with less than 40 percent of the new company. The deal will require changes to a 2004 law that requires the government to maintain at least 70 percent of GDF.

The merger ``will not generate any job losses'' but would create euro500 million (US$595 million) in annual savings, GDF and Suez said in their joint statement. It will create a major new player in electricity, water and environmental services with annual revenue of euro64 billion (US$76 billion) and control of Europe's largest gas transport and distribution network.

The offer represents a 3.9 percent premium over GDF's average share price in the three months to Feb. 24, the companies also said.

Explaining the government's intervention on Saturday, Prime Minister Villepin stressed energy supply concerns. GDF had already announced plans to reduce its dependence on Russian gas _ which currently accounts for about one-quarter of its supply _ after an attempt by Moscow to cut off gas to Ukraine caused shortages across Europe last month.

``In an increasingly energy-dependent Europe, the critical size of the new group will make it a natural partner of large producing countries and will favor the emergence of major energy projects,'' GDF and Suez said in their Monday statement.

The companies said they expect the deal to be complete by the end of the year.