Suez Could Benefit From the Hedge Fund Tug Boats
(Bloomberg Opinion) -- It’s nearly seven months into the attempted hostile takeover of Suez SA, the French water group whose history dates back to the construction of the Suez Canal, and the potential deal is still stuck. There is a way to unlock a transaction, but it would benefit from pressure from investors acting as the tug boats.
Suitor Veolia Environnement SA tried to bag a bargain when it embarked on its pursuit last August, instead of negotiating a friendly transaction by making an offer Suez couldn’t refuse. The Paris-based utility first secured a 29.9% blocking stake, paying 3.4 billion euros ($4 billion). In February, Chief Executive Antoine Frerot followed that up with a hostile bid for the rest of the company — at the exact same valuation of 18 euros a share.
This needlessly drawn-out strategy has been to Suez’s advantage. The target has used the time to cut its net debt by 1 billion euros over the second half of 2020, a reduction worth more than 1.50 euros per share. Rising markets have made Veolia’s offer look less generous.
But Suez cuts a no more sympathetic figure. It’s deploying a lamentable poison pill defense, using Dutch anti-takeover laws to thwart Veolia’s plan to sell its French water business to assuage antitrust concerns.
At least there’s finally been some sense of movement on Suez’s side. Earlier this month Chief Executive Bertrand Camus said he would scrap the poison pill completely if Veolia raised its bid to 22.50 euros a share. Alternatively, Veolia could buy the company at 20 euros a share on the condition that it sell more than half of Suez on to French buyout firm Ardian (here supported by U.S. peer Global Infrastructure Partners). It’s this cheaper scenario that Suez is promoting. Shareholders would get less, but a deal would probably close faster given Suez’s support.
The Suez share price has recently gone over Veolia’s bid, pushing Frerot for a sweetener. A revised offer at the lower end of Suez’s range looks like it would be enough to win over the market. The real stumbling block is therefore reaching agreement over the scope and destination of the antitrust disposals. Suez had 3 billion euros of adjusted Ebitda in 2019. Ardian wants to buy unspecified French and international assets with 1.7 billion euros of Ebitda. Veolia has said it would sell Suez’s French assets to a different infrastructure fund. These have sales of 5 billion euros. Ebitda isn't disclosed but roughly 1 billion euros is a reasonable estimate.
The obvious way forward would be for Veolia to raise its price to within the range Suez has set, with Suez yielding on the conditions around disposals. The two sides need to talk.
Suez will have gained many hedge fund investors over the course of this saga, and they are not going to let Frerot get a bargain. With capital tied up in his Suez blocking stake, he cannot easily walk away from the situation. Financing costs and political risk seem more likely to increase than decrease. It’s welcome that Suez is not fighting for independence at all costs, but the poison pill remains hard to justify. Today, Suez appears to have leverage without it.
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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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