GdF-Suez merger faces hurdle from French President Sarkozy

Mumbai: The €90-billion merger of French utilities Suez SA and Gaz de France SA, announced a year and a half ago, is still hanging fire. The deal, which seemed so near is now so distant ever since the recently elected president Nicolas Sarkozy took charge of the government.

French newspapers had in the past week reported that the government, which owns a majority of GdF, would soon approve the merger, which would create Europe''s No. 2 utility by market capitalisation. But finance minister Christine Lagarde claimed the state was still weighing a "whole series" of different scenarios.

GdF says it is committed to the Suez deal. Jean-Francois Cirelli, chief executive of GdF, who insists it is the best deal, has even warned politicians against interfering in his business decisions. Privately, however, GdF sources admit the decision is out of their hands. "It is up to the politicians and like everyone else we are waiting for an announcement," said one source at the Paris-based utility.

Reports, meanwhile, emerged that President Nicolas Sarkozy would push for a deal between GdF and Algerian energy group Sonatrach, when he visits Algeria in July. Sarkozy has already shown himself to be a hands-on leader and the final decision on the future of GdF is likely to come from the very top. Certainly the president, who as finance minister had a track record of meddling in deal-making, may tread carefully this time.

For one thing, the unions are against the proposed merger as the workers are reluctant to see GdF privatised in the process. Also, this may not fit into Sarkozy''s scheme of things as he has already announced contentious labour reforms.

The merger was initiated and championed by Sarkozy''s old political foe, former prime minister Dominique de Villepin. The president may be in search of a "more suitable partner" for GdF.

While a drastic change of the exchange terms may be out of the question for the government which stands to lose its controlling 30-per cent stake in the new company, looking beyond Suez has in fact given GdF some leverage in merger negotiations that had earlier swung strongly in Suez''s favor.

Suez shareholders have been agitating for a significant improvement on the terms of the merger, which initially afforded them a one-for-one share swap plus a special dividend. Suez shares, which have gained immensely during the past 12 months, now trade at huge premium to its would-be partner''s stock.

GdF, which is investing heavily in infrastructure, also does not have spare cash to supplement its offer. But there is an option of splitting the business for sale. Suez could divest its water and waste business which it runs alongside its power and which could be worth €30 billion.