How France’s Warring Water Giants Stepped Back From Brink

(Bloomberg) -- The rare spectacle of a hostile takeover battle between two of France’s largest companies has come to a sudden end.

After many months of bitter rhetoric, legal tussles, and accusations of bad faith or sabotage, the cooler heads who had been working quietly behind the scenes finally engineered a compromise. Suez SA agreed to be acquired by Veolia Environnement SA at a 13 billion-euro ($15 billion) valuation, creating a global giant in waste and water services.

The deal was unlocked partly by the most obvious means -- Veolia offered a higher price. But getting to the point where money was enough to tip the balance required some subtle interventions from France’s political and business elite, and a wider realization that prolonging the conflict could damage the two companies.

“It’s a compromise, not everything is perfect but it was time to reach a solution,” Suez Chief Executive Officer Bertrand Camus said in an interview on France Inter radio on Tuesday. “We tried to escape it, but at some point one has to be pragmatic.”

Obstacles Overcome

The stalemate that had persisted since Veolia revealed its plan to buy Suez back in August first showed signs of ending on Wednesday, according to people with knowledge of the matter, who asked not to be named because the information was private. That’s when the companies agreed to a new round of mediation led by Gerard Mestrallet, one of the most prominent figures in French business.

Mestrallet, himself a former chairman of Suez, was well placed to break the impasse. The 72-year-old executive has a deep knowledge of the interests at stake, having already attempted back in 2012 to combine the two companies, which have been arch-rivals since their creation during the French industrial revolution of the mid-19th century.

The mediation began on Thursday, but soon ran into the same old obstacles, the people said. Suez CEO Camus, who took the top job in 2019 and was in the early stages of his plan to transform the company, remained focused on limiting the scope of the assets that Veolia would retain after a takeover.

Throughout the process, Camus had insisted that some part of Suez should continue as a standalone entity after any deal, retaining enough scale and growth potential to be a viable business. Despite lengthy discussions, Mestrallet couldn’t persuade him to offer up enough of Suez’s assets to make a deal that would be acceptable to Veolia.

While Camus stuck to his position on the scope of the deal, Mestrallet also held mostly separate talks with Suez Chairman Phillipe Varin. He was more focused on getting a higher price from Veolia, the people said.

Government Pressure

As the mediation got going, the French government chose its moment to apply some pressure.

Finance Minister Bruno Le Maire, who had consistently urged Suez and Veolia to do a friendly deal, met on Thursday with Eric Lombard, the CEO of state-controlled lender Caisse des Depots et Consignations, and asked him to tell Veolia that he would sell CDC’s holding in the company -- which stood at 6.1% at the end of last year -- if it persisted in pursuing a hostile takeover, the people said.

CDC confirmed in a statement that Lombard discussed the situation in a meeting with Le Maire. As one of Veolia’s largest shareholder, the CDC said it can easily pass on messages to management, but rejected the suggestion that it could put pressure on any of its large holdings in the way described by Bloomberg.

The French Finance Ministry declined to comment.

With the stakes getting higher for both sides, a breakthrough came on Sunday morning, when Mestrallet brought both sides together at Le Bristol, one of the chicest hotels in Paris, close to the French Presidency’s Elysee palace.

Veolia CEO Antoine Frerot offered to sell back more assets to the entity that would continue to trade under the Suez name, and increased his price from 18 euros to 20.50 euros a share.

Suez was represented by Varin, who had taken the lead for his side in the talks, and Delphine Ernotte, a non-executive director at the utility and Chairwoman of public broadcaster France Television SA. Camus wasn’t present at the meeting, the people said. The CEO told France Inter radio on Tuesday that he hasn’t made a decision about his own future.

A spokeswoman for Suez declined to comment on the talks.

Varin took the new offer back to Suez’s board, which met after midnight. Despite some initial resistance, the combination of a higher price plus the guarantees on assets and employment persuaded a majority of the company’s directors to accept the offer.

Global Giant

“Our project to combine Veolia and Suez has reached a really important milestone,” Frerot told reporters on Monday after announcing the acquisition. “This agreement was reached thanks in particular to the help” of Mestrallet, he said.

The deal looks like a victory for Frerot. The enlarged company will have 37 billion euros in annual revenue, compared with Veolia’s 26 billion euros last year, and greater exposure to faster-growing international markets.

The creation of such a global giant will require approval from competition authorities in several countries, and Frerot said the deal could be completed by the end of the year.

The compromise also gives a substantial reward for Suez’s months of resistance to the initial hostile approach. Not only is Veolia paying about 14% more than it originally offered, but it also committed to selling a larger tranche of assets to a group of French and U.S. investors that will perpetuate the Suez brand.

French investment funds Meridiam and Ardian SAS, along with CDC and U.S.-based private equity firm Global Infrastructure Partners, will be offered the chance to buy Suez assets largely focused on France and water with annual revenue of 6.9 billion euros, or about 40% of the company’s current size, Frerot said.

After months in which the two antagonists only seemed capable of escalating their battle, the sudden rapprochement took a lot of people by surprise. On the exchange in Paris, shares of Veolia jumped 9.7% and Suez surged 7.7% on Monday.

The clearest sign of how abruptly peace had broken out came from Ardian, which said on Monday that it hadn’t even been privy to the latest talks and still needed time to study the agreement.

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