A French bid to build an environmental empire in a market depressed by the pandemic deserves a fatter premium.

Cleaning up?
A 19% one-day jump in a company’s stock price in the current pandemic-driven recession is the kind of thing you’d expect from the U.S. tech sector, not the staid world of European utilities.
Still, that’s what France’s Suez SA, whose business is water treatment and waste management, delivered on Monday after rival Veolia Environnement SA
offered more than 2.9 billion euros ($3.5 billion) for 29.9% of the firm.
The stake, currently held by gas utility Engie SA, is just the appetizer. Veolia’s boss, Antoine Frerot, is proposing to eventually swallow all of Suez and build a “world champion” with 26 billion euros in combined sales in Europe and North America. Antitrust concerns over a combined market share of nearly 60% in France, which hobbled a previous attempt at a tie-up in 2012, would be soothed by preemptive asset sales.
Opportunity, or Opportunism?
Veolia’s offer of 15.50 per Suez share is flattered by the impact of Covid-19
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Veolia’s offer of 15.50 euros per share may look frothy at first glance. Suez swung to a
loss in the first half of this year. It has underperformed listed peers over the past five years on a total-return basis. The price offered for Engie’s stake represents a 39% premium to Suez’s price a month ago. And after yesterday’s share surge, the company was valued at 78 times annual earnings, some way above its peer-group median of 15.9.
Yet my News colleagues report those close to Engie are grumbling that Veolia has lowballed its bid. And they have a point.
As painful as Covid-19 has been for Suez’s share price,
dividend policy and cost of doing business — when the economy tanks, so does industrial demand for waste management — its underlying operations have started to look in better shape. The company expects a recovery in pretax earnings in the latter half of this year. Veolia’s Frerot seemed to acknowledge as much, boasting a tie-up would deliver a boost to profitability from the first year. And that’s with promised cost savings of only 500 million euros, a sum that represents an estimated 1.5% of combined operating costs, according to Barclays research. 
Relative to Suez’s depressed springtime share price, Frerot’s bid looks generous; relative to its February price of almost 16 euros, much less so. No wonder Veolia’s own shares rose 5.7% on Monday after announcing the proposal, despite a warning the bid would be funded by a capital increase.
It looks in Engie’s interest to rattle Veolia’s cage and push for an extra sweetener. It has levers to pull: It could argue that a Veolia-backed tie-up is not the only way to create value from Suez, and other buyers may be interested in smaller chunks of the utility. It could wait for an activist investor to lobby for a better price, knowing Amber Capital has pushed for changes at Suez in the past.
Suez and Engie have their own
frustrated investors to consider when deciding how far to push Veolia. Adrien Dumas, a fund manager at Mandarine Gestion, warns this is a complex deal to engineer with risks on the regulatory and financing fronts. It’s by no means a done deal. Suez shares currently trade below Veolia’s offer price, suggesting an unwillingness on the part of some investors to risk holding out for more only to end up with less — or nothing. Suez itself is warning Veolia’s bid carries “great uncertainties.”
For the time being, though, it’s in Frerot’s interests to try to keep things as amicable as possible — including price. Engie’s biggest shareholder is the French state, and Emmanuel Macron will want a good deal for the taxpayer. Nobody wants a Suez crisis, and Veolia should work to avoid one. 

This column does not necessarily reflect the opinion of the editorial board or LP and its owners.
To contact the author of this story:
Lionel Laurent at llaurent2@bloomberg.net
To contact the editor responsible for this story:
Melissa Pozsgay at mpozsgay@bloomberg.net
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