GDF-Suez - rock solid logic

It is ironic that, of all the mega-mergers scheduled to take place this year, the one that makes the most sense - GDF-Suez - is taking the longest. Whether motivated by French protectionism or not, the industrial to the deal, first mooted back in March 2006, is extremely strong. Suez has Electrabel's large electricity customer base and power generating skills, while GDF has the equivalent in the gas market. With retail market opening set to start in France - and across the EU -rom July, GDF-Suez represents a real dual-fuel threat to EDF.

Because the French Constitutional Council has frozen the merger until after July 1, however, everything remains in limbo until new French president Nicolas Sarkozy has decided whether to back the deal or not. If he does, he must deal with hostility from the country' powerful energy unions, and Suez must deal with shareholder doubts. The feeling is that the merger is more likely now Sarkozy is elected, but it remains very far from a done deal.

Suez chairman Gerard Mestrallet believes merger with Gaz de France is the best option for the company. Speaking at the Suez annual shareholders' meeting in April, Mestrallet said he had discussed a merger with Thierry Desmarest, chairman of Total, but neither were that interested. "We are not in the same businesses," Mestrallet said. "We don't produce gas and oil. Our market lies with customers who are interested in both gas and power. We are not just interested in size, it has to make sense. And upon completion of a merger with GDF we would not fear predators. We would be larger than Enel [of Italy], and [Germans] RWE and E.ON."

If GDF-Suez fails, "Suez is still going to move," Mestrallet said. "We could replace this merger but not by merging with Total. We could focus more on power." GDF-Suez foresee "at least" Euro 500 million per year in synergies before tax with full implementation from 2009. The savings break down is as follows: sourcing Euro 250 million; dual fuel supply Euro 80 million; energy services Euro 50 million; and purchasing Euro 120 million. The two would have had combined revenues of Euro 63.9 billion in 2005 (Suez Euro 41.5 billion, GDF Euro 22.4 billion), EBITDA in 2004 of Euro 10.2 billion, and market capitalization as of February 24, 2006 of Euro 72.5 billion.

GDF-Suez - a new energy/environment giant?

• No. 1 network for natural gas transport and distribution in Europe

• No. 1 buyer and supplier of natural gas in Europe

• 26 billion cu m in regasification terminals - world leader

• No. 5 producer of electricity in Europe

• European leader in energy services

• A world leader in water and waste management services

• Combined workforce of over 200,000

• Electricity production: Installed capacity of 58 GW (32 GW in Europe, 26 GW internationally)

• 2,000 MW in construction in France

• 2,000 MW in construction Spain and Italy

• 746 MW in construction in North America