(Bloomberg Opinion) -- You can see why Antoine Frerot has had a bit of a swagger this week. The boss of Veolia Environnement SA looks like he’s in full control after launching a quasi-hostile, two-step takeover of French utility peer Suez SA. But he surely wants the deal badly, and his tactics are risky. He could be easier to rattle than appearances suggest.
Veolia’s approach is aggressive and smart. The water and waste group is starting with a 2.9 billion-euro ($3.4 billion) offer for only 29.9% of Suez. This has been made exclusively to the main shareholder, energy provider Engie SA, which owns 32%. The move aims to keep Veolia below the threshold where regulators would force it to bid for the whole company. It also puts Engie on the spot. It provides a speedy cash exit from an investment that the 29 billion-euro power company suggested in July wasn’t core to its business.
The only quibble could be on price. Engie Chairman Jean-Pierre Clamadieu says it’s too low.
Perhaps Frerot is hoping Engie won’t ask for a lot more. After all, the Suez stake is a small part of its empire. A 10% bump in the offer price would be worth just 1% of Engie’s market capitalization. The French state is Engie’s lead shareholder and sounds happy with a Veolia-Suez marriage.
Still, Engie shouldn’t let itself be taken for a ride.
The Suez stake may have no strategic value for Engie, but it has plenty for Veolia because it’s a stepping stone to full control of its rival. Frerot will surely pay a full price if pushed.
He could certainly justify offering more than the 15.50 euros-a-share he is dangling. True, the bid represents a thumping 50% premium over where Suez stock was trading just before Engie signaled it was open to offers. But that’s a pandemic benchmark after a dividend cut. Suez stock has clear recovery potential if economic activity picks up should Covid-19 abate. Yet the offer is below Suez’s late February share price.
Consider too the synergies if Veolia achieved full ownership. It says cost cuts would deliver a 500 million-euro boost to profit on the Ebitda measure. The scope for revenue and capital expenditure benefits suggests more is possible. Say 600 million euros is realistic. Such gains can be valued at over 4 billion euros, using the companies’ average Ebitda trading multiple, and discounting for the four years until they fully materialize.
Allocating just over half of this value creation to Suez shareholders is worth around 4 euros per share. If a fair Suez valuation is closer to February’s 15 euros per share than July’s roughly 10 euros, shareholders could demand a take-out in the high teens without being greedy.
The difficulty for Engie — and potentially Suez — is that Suez shares are trading below Veolia’s offer, applying no pressure on Frerot to sweeten. But Engie can take its own view regardless of the market. Its Suez stake would make Frerot’s life a lot easier. Only when he gets that can he start smiling.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.
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