Suez/Veolia: avoid more stress, pay the excess

Solutions are part of the everyday business of French water and waste groups Veolia and Suez. But solving the deal deadlock between these two has proved elusive. Formal proposals for a long-mooted alternative offer for Suez arrived from Ardian and Global Infrastructure Partners over the weekend. These were swiftly brushed aside.

Veolia has no interest in helping Ardian and GIP break up Suez when it still hopes to do so single-handedly. A value for Suez of €20 a share suggested by Ardian and GIP is more than Veolia has offered, suggesting how this saga will conclude.

The pair must have guessed Veolia would turn down their invitation. Instead, the move appears to validate Suez’s claim that a higher price is justified. The board has set €22.50 a share as the price where it would willing to open its arms to Veolia.

That combination would create a hoped-for national champion in water and waste that is better equipped to take on global competitors. A faster than expected recovery in the sector’s earnings alone suggests a higher price is warranted. Suez shares trade at 19 times two-year forward earnings just a hair above the average of the past three years.

Suez has also upped the stakes by saying it has activated the Dutch foundation into which it has placed its French water business. This poison pill defence has the potential to make life difficult for Veolia even if it succeeds with its existing bid at €18 a share.

It is clear that remains too low. Targeted returns on investment of 9 per cent at Veolia mean it can afford to pay more. It could raise its bid to €21 and still exceed that threshold say analysts at Jefferies. Veolia’s chair Antoine Frérot will have to decide whether he agrees with that view, boosted by cost cuts.

Otherwise, more tiresome wrangling lies ahead. The six months of messy back and forth between Veolia and Suez suggests he would be better off paying more now rather than later.

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