July 17, 2008

Suez and GDF Approve Merger Alliance Ends Chapter in Debate on Privatization in France

Suez shareholders on Wednesday overwhelmingly approved a long- delayed euro 100 billion merger with Gaz de France to create one of the largest electricity and natural gas groups in Europe.

The GDF Suez group - the union of the largest European natural gas supplier and one of the world's biggest electricity producers - will have combined annual sales of euro 74 billion, or $117 billion, and vie with E.ON of Germany for the rank of the second-biggest utility on the Continent, behind Electricite de France.

"Shareholders have voted today by more than 99 percent. It is a success but also a challenge because we have to deliver now and this is our first priority," the Suez chief executive, Gerard Mestrallet, said nearly all of the votes from shareholders present or represented backed the merger.

As the Suez meeting ended, shareholders of Gaz de France gathered to have their say. The measure to approve the deal was adopted by 99.91 percent of shareholders present, represented or who had voted by proxy. Because the French government holds a 79.8 percent stake in GDF, there was little doubt about the outcome of the vote.

Before the vote, the final shareholder meeting of a company whose history stretches to the building of the Suez Canal, Mestrallet had said that the merger was an opportunity to create a crucial energy player, citing commercial, industrial and geographical synergies between the two companies.

"This is what will allow us to speed up our industrial development," he said, adding that the group would put a focus on nuclear energy and offering natural gas and electricity combinations.

A few shareholders objected to the logic of the merger: One called it "the alliance of a right arm and a left leg."

At the Gaz de France meeting, the chief executive, Jean-Francois Cirtelli, told shareholders that the merger would give GDF Suez the financial means to develop its business and help Europe reduce its dependence on natural gas and oil imports.

The votes concluded a two-and-a-half year process marked by bid threats from Italy, a political dispute about privatization in France, union opposition and bickering over the financial terms.

The shareholder votes seal an alliance engineered by the French government in 2006 to fend off the threat of a bid for Suez from Enel, an Italian utility, and create a global giant at a time when oil prices have become a central issue for governments and consumers.

The merger takes effect Tuesday.

Gaz de France and Suez have said that they aim to build up their production of natural gas, and to increase their capacity to produce electricity to 100 gigawatts by 2013, from 65 gigawatts now, through new nuclear power and renewable energy projects.

Mestrallet has said that GDF Suez might bid for contracts to build new-generation nuclear reactors in Britain, and would decide at the start of 2009 whether to take part in the construction of a second of the so-called European pressurized reactors in France, where it would compete with EDF.

"Production, supply and durable development challenges in the energy sector imply a need for investments," Cirelli said. "It is vital to invest in electricity plants to replace aging ones, and create new capacities, build new gas distribution networks. It is vital to invest in liquefied natural gas, in LNG tankers, in LNG terminals. To be able to make such investments, the size of the company, and the strength of its balance sheet, matter."

Suez and GDF have already indicated they would expand their business through investments in new capacities and acquisitions, even though any major deal would first have to be approved by the French state, which would hold a blocking 35 percent stake in the combined company.

Shares of Suez rose euro 1.16, or 2.89 percent, to close Wednesday at euro 41.36. GDF rose euro 1.34, or 3.48 percent, to close at euro 39.85. Shares of the companies have gained about 40 percent since the merger was first announced in 2006 .

The politically charged deal was delayed by disputes over valuation and control before final terms were set in September 2007, on the basis of 21 Gaz de France shares for 22 Suez shares and the spin-off of 65 percent of Suez's water and waste business.

President Nicolas Sarkozy of France, who as economy minister had vowed not to privatize Gaz de France, encouraged Mestrallet to abandon most of the Suez water business to slim down the group and make a merger of equals with Gaz de France possible.

On Wednesday, 99.7 percent of represented Suez shareholders adopted a measure under which they would receive one share of Suez Environnement for every four Suez shares they owned.

Mestrallet said the spin-off of Suez Environnement, the world's second-largest water group after Veolia of Paris, would enhance its visibility. The stock will start trading Tuesday.

Originally published by Reuters.

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