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France Extends Reach through Suez-Gaz de France Merger

The European Internal Market Commission has given the French government two weeks to explain the sequence of events leading up to Gaz de France's proposed $47 billion merger with Paris-based global energy conglomerate Suez. The merger was hastily crafted over the Feb. 26 weekend apparently to discourage a possible bid for Suez by Italian utility company Enel.

France would hold a 34% stake in a new global energy company formed by the merger, which is expected to be completed in the second half of this year. The combined energy company would have a market capitalization of about EUR72 billion (US$86 billion) with revenues of EUR64 billion (US$75.9 billion), and would become one of Europe's leading players in energy and environmental services. It would be second only to Germany's E.On AG in Europe by market capitalization, and would control the continent's largest gas transportation and distribution network.

According to the terms of the deal, the merger would be preceded by the payment of a dividend of EUR1.25 billion (US$1.48 billion) by Suez to its shareholders, equivalent to EUR1 per Suez share. The dividend would boost the total value that Suez shareholders will get to EUR39.14 billion (US$46.56 billion). The exchange ratio in the merger after the proposed dividend will be one share for one share, which represents a premium for Gaz de France shareholders of 3.9% on the basis of the average stock price over the last three months as of Feb. 24. Dilution of the French government ownership of Gaz de France will require a change in current French law which calls for a government ownership level of at least 70%.

The merger will send ripples across the Atlantic because of Suez's rapidly growing presence in the U.S. energy market. The company owns and operates the Everett, MA, LNG import terminal, was the second largest LNG importer in the U.S. last year and has plans for two other proposed LNG import terminals offshore Boston and Florida. It also is a major player in the U.S. power market with 5,500 MW of U.S. power generation, and one of the largest retail power marketing businesses in the U.S.

The merger already has had an impact on Suez's Houston-based North American operations. William P. Utt, CEO of Suez Energy North America, resigned late last month to become president of Halliburton subsidiary KBR. He told employees on Feb. 17 of his decision to leave the company. His last day at Suez will be March 19. A spokesman for Suez said that so far there have been no other changes among Suez's top North American executives.

The new Paris-based global energy company is expected to be headed by Suez's current chairman and CEO, Gerard Mestrallet, with Gaz de France's CEO, Jean-Francois Cirelli, as the No. 2 man, according to French newspapers.

The companies said the deal would generate EUR$500 million (US$592.6 million) in annual savings from optimized supply strategies, including portfolio optimization, reduced procurement costs and increased LNG trading. The remainder would come from dual-energy offers, primarily in France, from the optimization of energy services and from savings on non-energy related purchasing.

The merger also is designed to help address France's energy security concerns. The country has been interested in reducing its dependence on Russian natural gas after Russia cut off supplies to Ukraine in January causing shortages across Europe.

The new company would become the fifth-largest producer of electricity, the operator of the largest European gas transportation and distribution network, and the leading energy services provider in Europe, as well as a world leader in water and environmental services.

Suez employs 160,700 people worldwide and achieved revenues of EUR$40.7 (US$48.3 billion) in 2004, 89% of which were generated in Europe and North America. Gaz de France has more than 45,000 employees, recorded net sales of EUR22.4 billion (US$26.6 billion) in 2005, and serves 13.7 million customers, including 11 million in France.

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