By Huang Haozhe (IE Business School), Nathan Walemba (University of Oxford)
Overview of the deal
Acquirer: Veolia Environnement S.A.
Target: Suez S.A.
Total Transaction Size: 2.91 billion EUR
Closed date: Q4 2020
Acquirer advisor: Perella Weinberg, Messier Maris and Citi
Target advisor: Goldman Sachs, JPMorgan, Société Générale and Rothschild
A merger between two French utility groups was speculated as early as 2012, however, the deal was scrapped due to disagreements on price. In July this year, Engie, which holds a 32 per cent stake in Suez, said it was open to selling its stake during a strategic review of its portfolio. Veolia rapidly put together a €15.50 a share cash offer to buy 29.9 per cent of Engie’s stake in Suez. If the offer is successful, Veolia will make an offer for the rest.
"In a global market, size is critical to finance the equipment needed to fund the environmental transition of cities and industries, the reunion of the two groups would be the football equivalent of a merger of Manchester United and Manchester City" – Veolia CEO Antoine Frérot
Company Details: Veolia Environnement S.A.
Veolia is a French transnational company with most of its business concentrated in water, waste management, and energy. With over 300,000 employees in almost 50 countries, Veolia boasts over 2,500 subsidiaries around the world.
Founded in 1853, headquartered in Paris, France
CEO: Antoine Frérot
Number of employees: 163,226
Market Cap: €10.78B (as of 13/09/2020)
EV: $23.02B
LTM Revenue: €27.19B
LTM EBITDA: €2.36B
LTM EV/Revenue: 0.90
LTM EV/EBITDA: 10.02
Company Details: Suez S.A.
Suez is a French multinational company that operates in the water, electricity, and waste management sectors. It was formed as a result of the 1997 merger of Compagnie de Suez and Lyonnaise des Eaux. As of 2020, Suez has served over 117.4 million people around the world.
Founded in 1997, headquartered in Paris, France
CEO: Bertrand Camus
Number of employees: 88,775
Market Cap: €9.53B (as of 13/09/2020)
EV: €23.18B
LTM Revenue: €17.53B
LTM EBITDA: €2.13B
LTM EV/Revenue: 1.32
LTM EV/EBITDA: 10.89
Short-term consequences
Aware of antitrust and employment concerns, Veolia would sell Suez’s water business in France to French infrastructure fund Meridiam. Veolia also identified other potential divestments, including some waste management activities in France and a handful of cases outside France. Veolia sees operating and purchasing synergies of 500 million euros from the deal.
However, the deal has many hurdles to overcome. Suez has called the bid opportunistic and hostile. According to Reuters, French private equity firm Ardian has entered discussions regarding the proposed sale of Engie’s stake in Suez. Engie wants a rival bid from Suez in hopes of a higher price. Some suggest Suez is likely to put together a rival bid for Engie’s stake, while others say Veolia doesn’t have an incentive to pay more to win control of the whole firm.
The share price was trading around 10.5 EUR before Engine’s announcement in July, and it went up to 12 EUR before the bid from Veolia was announced on August 30th. The share price has been around 15 EUR since then, which is close to the 15.5 EUR that Veolia is offering. The price will continue to be a battling field. Amber Capital, which has a small stake in Suez, argues that 17 EUR per share could accurately reflect Suez’s value.
The deal will cost Veolia about 3 billion EUR, and if the full merger goes through, it will cost about 10 billion EUR. Veolia said it will use cash to finance the initial 3 billion EUR bid for the 29.9% stake in Suez, whereas the financing options are open for the remaining 7 billion EUR. Up to H1 2020, the company has a strong cash position of 7.9 billion EUR, complemented by 4.2 billion EUR of undrawn credit lines.
Long-term Upsides
This is a unique opportunity to create a world champion in environmental services and ecological transition. Governments around the world are pushing to spend more on environmental services in their economic stimulus packages. Emmanuel Macron announced that the French government will invest 15 billion EUR over the next two years to accelerate moves to a greener economy. The EU Commission also laid out the Green New Deal for tackling climate change. The support from policymakers will be beneficial to both Veolia and Suez. The combined company will be in a stronger position to deliver ecological transformation while accelerating international development and strengthening the capacity for innovation.
The two companies have broad complementary expertise, including water treatment and distribution, waste collection and recovery, particularly toxic waste, plastics recycling, optimization of energy consumption. It could offer a larger portfolio of solutions to customers facing environmental issues, making their activities cleaner and more efficient.
The deal would also have geographical synergies, with Veolia well established in central and eastern Europe and the UK, while Suez’s traditional markets include Spain and northern Europe. A merger would also reinforce their positions in the Americas and Asia. Both companies have undertaken projects across Africa, which have a substantial role in Africa’s sustainable waste management sector.
Furthermore, the deal could help both utility companies revive earnings dented by the coronavirus pandemic. Suez sees a 6% loss in revenue due to volume loss in water and waste management and does not expect volume to fully normalize until the second half of 2021. Suez has announced its 4 billion EUR divestment plan last year due to pressure to cut costs. Similarly, Veolia's H1 revenue was down 6.1%, and EBITDA down 20% YOY.
The European utility industry has offered dealmakers a bright spot in the first half of the year. The value of acquisitions involving utility companies in the region is up 58% in 2020. In March this year, KKR acquired the UK recycling company Viridor in a £4.2bn deal, signalling the attractiveness of the waste management sector.
Risks and Uncertainties
One of the uncertainties facing the merger is potentially not being able to convince the European Commission that the merger should take place. The commission has been against the idea of the ‘European Champion’, which goes against Veolia’s rationale for consolidation in the sector. The commission had previously rejected the merger between Siemens and Alstom which had followed in a similar path to Veolia and Suez.
IIn the eyes of Margrethe Vestager, Commissioner for Competition at the European Commission, Veolia’s takeover of Suez is aggressive and could be deemed as a potential monopoly over key public services, with both of them controlling 60% of France’s water distribution networks. The problem with the monopoly is that this would lead to higher prices and for consumers, less competition, and a more static market. In April, Vestager went on record saying, “our rules haven’t changed, and this crisis certainly shouldn’t be a shield to allow for mergers that would hurt consumers and hold back recovery.”
Another uncertainty comes from whether Suez will be fully on board with the merger. Bertrand Camus, who has led Suez since 2019, has come out publicly and stated that Veolia’s offer was too low and that the “proposed deal by Veolia is an aberration and destructive for France”. Camus also stated Suez is working on plans to find other buyers to buy Engie’s stake. With a stake of 23.6% in Engie, the French government has a say in the outcome. Finance Minister Bruno Le Maire said in a statement that the government will study the offer, consider Engie’s interests, the quality of the industrial project and make sure there are a multitude of players in the business of providing services to local governments.
"Suez does not need to get married: we are already the world leader in water distribution, serving 145 million people" – Suez CEO Bertrand Camus