Can French M&A Get Any More Complicated?

Sealing takeover deals in dirigiste France in the middle of a pandemic isn’t easy when you’re a foreign bidder: Just ask Canada’s Couche-Tard Inc., whose tie-up talks for a potential acquisition of Carrefour SA were scotched by Emmanuel Macron’s government over the weekend.

Now the latest twist in Veolia Environnement SA’s attempt at creating a French global champion in water and waste management shows that even domestic deals with the backing of politicians don’t look much easier.

Veolia boss Antoine Frerot now faces some potential competition in his bid for Suez SA — which Paris last year said “made sense” — with French-led private equity consortium hinting vaguely at a rival offer. Ardian, in partnership with U.S. fund Global Infrastructure Partners, said it submitted a letter of intent with various options including an offer to “purchase Suez shares” at 18 euros apiece subject to due diligence. That’s the price Veolia has been dangling.

This is a very long way from being a firm offer. But the development still puts Frerot under pressure to make some extra concessions to clinch a deal. A private-equity transaction would have minimal antitrust risk, so any offer would be both less uncertain and faster to close, making it more attractive at the same price.

When Veolia acquired a 29.9% stake in Suez from French utility Engie SA last year, Frerot seemed in a far more comfortable position: The stake offered a point of entry amid cheap pandemic valuations that would deter would-be suitors and serve as a springboard for a takeover of the whole company.

But the need to seize this opportunity quickly may have blinded Frerot to the longer-term challenges in sealing politically sensitive takeovers in a post-Covid world. The open hostility of Suez’s board and its staff unions to Veolia’s raid pushed the French government to officially oppose the stake sale (which went through anyway) and demand that any deal be done on “friendly” terms. Next year is an election year in France, and nobody wants job cuts.

With Frerot unable to convince Suez of any amicable intentions, Suez’s management has dug in, deploying poison-pill tactics to thwart a full takeover: A new legal foundation to protect its domestic water business and a slew of lawsuits contesting Veolia’s ability to exercise its voting rights as a major shareholder.

Now it claims to have achieved the best possible extra line of sandbags: A potential alternative friendly bid on better terms. Suez said Ardian’s intervention meant it was now willing to commence talks with Veolia “with the aim of building a solution in the interest of all concerned parties, which would reinforce both of the two French leaders in environmental services.”

One can quibble over how serious the possibility of an offer by Ardian and Global Infrastructure Partners really is. It’s mentioned as an option. The alternative scenario is that the two join forces to buy overlapping French assets to address the antitrust snags of a Veolia-Suez tie-up. That would displace Veolia’s preferred anti-trust solution, which is to sell a piece of Suez to French infrastructure fund Meridiam. To get a nibble at that and other potential disposal candidates, Ardian and Global Infrastructure Partners need the credible threat of being able to buy all of Suez.

Even if this isn’t a straightforward auction, Suez still looks slightly more valuable — its shares rose 3% — and Veolia looks on the back foot, with its shares down 3%. The French government hasn’t given an official reaction yet, but it will surely reiterate that it wants a “friendly outcome,” something this private-equity-backed approach claims to offer.

Suez’s apparent willingness to sanction an offer at the price Veolia has been dangling, and its agreement to enter talks, are doubtless the beginning of the endgame here. That’s good for Frerot. But he’s made unnecessarily heavy weather of the situation. He acted with haste to seal a low price, one that might yet be potentially matched by private-equity bidders with less baggage.

Politically, he has lost some of his advantage by failing to deliver on his promises of a “friendly” deal. Veolia hasn’t lost this battle yet, but in an increasingly bitter and political grudge match, the path to a victory will require it to budge.

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.

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

©2021 Bloomberg L.P.

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