Veolia Makes an Offer Engie Shouldn't Refuse

(Bloomberg Opinion) -- Veolia Environnement SA has wisely bettered its first lowball offer for 29.9% of rival water-and-waste firm Suez SA with a seriously sweetened bid that Engie SA — the state-backed utility that owns the stake — will find very hard to refuse. The bigger question is whether it's enough to get French politics out of the way.

The new offer of 18 euros per share represents a 16% increase and values the Suez stake at 3.4 billion euros ($4 billion). Veolia boss Antoine Frerot's aim isn't just to stuff Engie shareholders' mouths with gold, but to remove as much political risk as possible. The company has committed to maintain full employment of Suez workers in France if it manages to swallow the entire company. Plus it's pledged any takeover would be on a friendly basis after six months of negotiations to reach an agreement. 

The new price is undeniably attractive. It represents a multiple of 90 times Suez's projected adjusted earnings this year and 28 times next year's, according to data compiled by Bloomberg. The earlier 15.50 euro offer proposed undemanding cost savings of only 500 million euros, a sum worth an estimated 1.5% of combined operating costs, according to Barclays. A bid in the high teens, as my colleague Chris Hughes has written, always looked more realistic.

While the fairer price should please Engie's board and shareholders of Suez, whose stock rose as much as 8% on the news, it's the friendlier tone that will please President Emmanuel Macron and his finance minister, Bruno Le Maire. Tensions are running extremely high between Veolia and Suez's board, which has resorted to increasingly desperate measures such as a “poison pill” move to block asset sales it says would be terrible for jobs and profits.

No French government wants to be lumped with job cuts, angry trade unions and a corporate battle so bitter it could hurt business in the long run.  

Frerot looked caught between Suez's demands for a full takeover and efforts by Le Maire to buy more time to find a solution. His new move represents a compromise: A higher price to seal this first transaction fast, followed by a slow cooling-off period to negotiate with Suez.

It's hard to see why Engie would say no to getting more cash for an asset it has no interest in keeping. The French state, which is Engie's No. 1 shareholder, would also get more bang for the taxpayer's buck. And so far Suez, for all its aggressive rhetoric and “crown jewels” tactics, hasn't come up with an alternative bidder or convincing value proposition.

Suez is still trying to convince Engie and the French government to rebuff Frerot's approach. But its defense has been weak so far. Its fundamentally dim view of Veolia's attempted stake purchase, along with the political risk and high antitrust hurdles to any full takeover deal, explains why Suez's shares are still trading below the new 18-euro offer price. The pressure from exasperated Suez shareholders will likely increase, as activist funds are urge the company's board to engage with Veolia.

Given Frerot has shown he can pull off a tactical climb down and reduce the hostility somewhat, there's an opportunity for his rival to do the same.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Lionel Laurent is a Bloomberg Opinion columnist covering the European Union and France. He worked previously at Reuters and Forbes.

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