After 18 months of talks Franco-Belgian power utility group Suez and French-governement controlled Gaz de France (GDF) have agreed to merge through an alomost one-for-one share swap to create a global energy major, GDF Suez.

The merger of the Suez, the world''s second- largest water company that also has energy operations, and Europe''s biggest natural-gas network operator, both based in Paris, would create a utility second only to Electricite de France SA in Europe.

Though they have been attempting to combine into one entity since 2006, a final agreement was eventually resolved over the weekend following meetings between the boards of the two companies.

Analysts had feared a breakdown in talks between Suez and the office of French President Nicolas Sarkozy due to disagreements over the terms of the merger as Suez had shown faster growth than Gaz de France since the merger proposal was unveiled in February 2006, requiring the original terms of the merger to be renegotiated.

Now valued at about €56 billion euros ($76 billion), the merger was conceived to pre-empt a possible bid for Suez by Enel SpA of Italy and also to create Europe''s second-largest power utility.

The new plan was also conceived in deference to the wishes of French President Nicolas Sarkozy, who just last week favoured a merger of Gaz de France with only the energy business of Suez.

Accordingly, the deal would require Suez to divest 65 per cent of its water and waste management operations, in Suez Environment, valued at about €20 billion, by either putting its shares for sale through the stock market and paying shareholders a special dividend, or distributing the shares directly to shareholders and merging the energy operations of Suez with state-controlled Gaz de France.

Divesting Suez''s water and waste unit, to create equal-size companies, avoids overly diluting the stake of the government, which holds 80 per cent GDF.

After the divestment of the majority 65-per cent of Suez''s water management business, this "merger of equals" would see an exchange of 21 Gaz de France shares will be exchanged for 22 Suez shares, enabling the French government to hold a stake of over 38 per cent in the merged entity.

French Prime Minister Francois Fillion told Inter Radio of France, "With 40 per cent, the state keeps control. What is important is to have control. We have control, we control the strategy."

Initially Suez chairman Gerard Mestrallet had resisted selling the water business.

The merged group''s organisation will be structured around five business units — infrastructure, global gas and LNG, energy France, energy Europe and international and energy services.

The tie-up between Gaz de France and would create:

• Europe''s largest buyer and seller of gas
• Global leader in liquefied natural gas (LNG), the number one importer and buyer of LNG in Europe with a 25 per cent market share and with a leading position on the Atlantic basin
• Number five and number two European and French power producer respectively; with strong positions in the United States, Brazil and the Middle East
• European leader in energy services
• Number one gas transmission and distribution network operator in Europe
• Number two storage and LNG terminal operator in Europe

In the context of increasing European energy dependency, the new group will have a better negotiating position with the energy-producing countries while negotiating new agreements and be able to strengthen its exploration-production capabilities.

The two companies expect the merger to result in operational synergies of about €1 billion per year by 2013 (including approximately €400 million by 2010), after taking into account the impact of the commitments made to the European Commission.

They said in a statement, "In addition to these operational synergies, which will require limited, non-recurring implementation costs equal to roughly €300 million total, there will be benefits related to the financial optimisation of the new group estimated at approximately €1 billion. In the longer term, the new group will have the potential for additional synergies including the optimisation of the investment programme and the development of revenue synergies."

Gérard Mestrallet, chairman and chief executive officer of Suez will run the new group jointly with Jean-François Cirelli, vice-chairman and president.

In response to concern voiced by the unions, the company said in a statement, "The new group will be a strong creator of jobs. The teams will be integrated while respecting the culture of both groups."