Veolia Pounces on Rival to Create Waste Giant to Counter China

(Bloomberg) -- Veolia Environnement SA moved to buy its biggest rival in a bid to create a global waste and water giant and stay ahead of looming competition from China.

The French company’s opportunistic attempt to buy Suez SA revives an effort that failed eight years ago. The timing may be better now, with climate change high up on the global agenda and governments around the world looking to invest in recycling services and secure water resources.

Those trends have propelled a flurry of dealmaking. China has merged several companies, while KKR & Co. in March agreed to buy British waste-management company Viridor Ltd. for about $5 billion and EQT AB bought French peer Saur two years ago.

“Consolidation will continue,” Veolia Chief Executive Officer Antoine Frerot said on a conference call Monday after unveiling a 2.9 billion-euro ($3.5 billion) offer for an initial 29.9% stake in Suez -- the first step in a potential full takeover. “China has clearly understood the significance of these businesses,” he said, adding that China’s Beijing Enterprises Water Group Ltd. will become the biggest competitor in the future.

Veolia offered to acquire the stake from utilty Engie SA for 15.50 euros a share. If the deal goes through, it will make an offer for the rest using that price as a reference point, which would value Suez at 9.7 billion euros ($11.6 billion).

The companies tried and failed to cement a deal in 2012. Their unofficial talks foundered on antitrust issues over their French water businesses, government concerns about job losses and disagreements among leaders of both companies. At that time, Engie and Suez were pushing the effort, while now Veolia is in the driver’s seat.

Potentially heading off any antitrust concerns this time, French investment fund Meridiam has agreed to buy Suez’s French water business, Veolia said. Other areas of competition include some waste-management activities in France and a handful of cases outside France, according to Veolia. The company sees operating and purchasing synergies of 500 million euros in the deal.

The transaction would create a company with combined revenue of more than 40 billion euros with plants treating everything from drinking water to hazardous waste. It comes as utilities try to revive earnings dented by the coronavirus pandemic, and as governments push to spend more on environmental services in their economic stimulus packages.

Muted Reaction

While the bid is 27% more than Friday’s close, Suez has been hit hard by the coronavirus crisis. The company’s 52-week high was 16.04 euros in February.

Suez shares rose as much as 20% and traded up 19% at 14.53 euros as of 2:07 p.m. in Paris, suggesting some investors doubt Veolia’s bid will be successful. Veolia shares jumped 6.8%, and Engie shares climbed 6.2%.

“The acquisition of Suez would make Veolia more international, with significant positions in Spain and Northern Europe in particular,” Xavier Regnard, an analyst with Bryan, Garnier & Co. said in a note. “However, these two markets are mature and the situation” of Suez’s Spanish water business “is a bit challenging.”

While Engie has been non-committal so far, the company is seen as a willing seller after announcing a major asset sale plan in July. Suez launched a large divestment program last year to reinvest in more promising assets and reduce debt.

With a stake of 23.6% in Engie, the French government will have a say in the outcome, but the prospects of it standing in the way of the creation of a global giant seem unlikely, especially as Europe seeks to counter China’s growing ambitions.

France will study the offer and consider Engie’s interests and the quality of the industrial project, Finance Minister Bruno Le Maire said in a statement, adding that the country is keen to ensure the concentration doesn’t drive up prices for local governments.

Underscoring its commitment to the deal, Veolia said it might undertake a capital increase to help fund a full takeover and keep an investment-grade credit rating even after taking on Suez’s debt of about 11 billion euros.

“In a global market, size is critical to finance the equipment needed to fund the environmental transition of cities and industries,” Antoine Frerot said. “The complementarity of both groups is very strong.”

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