French utility firms agree merger

The merger will create the third largest gas and electricity company

French utility groups Suez and Gaz de France (GDF) have agreed to merge to create one of the world's largest energy firms, worth 70bn euros (£47bn).

Both firms have been trying to merge since 2006, but a final deal was agreed over the weekend following meetings between the boards of both firms.

Under the terms of the deal, the French government will hold more than 35% of the new firm - to be called GDF Suez

The deal has been opposed by unions, which fear it will cause job losses.

The French government currently owns 80% of GDF, and was keen to prevent Suez from merging with the Italian energy company Enel.

Shares in Suez and Gaz de France fell 3% and 2% respectively in Paris in response although they had risen 8% last week on rumours that a deal was imminent.

Terms

The "merger of equals" deal means that 21 Gaz de France shares will be exchanged for 22 Suez shares, the firms said in a joint statement.

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As Suez has expanded far faster than Gaz de France since the original plan was announced in 2006, new terms were needed to do justice to Suez investors, analysts said.

Suez will sell off its water and non-energy assets by listing them separately on the stock exchange at the same time as the merger goes through.

The merged group will keep 35% of the shares in the separate water and waste management business, while the rest of the shares will go to Suez shareholders.

There had been fears that the talks, between Suez and the office of French President Nicolas Sarkozy, could collapse, following disagreement over the terms of the tie-up.

Unions fear that it could lead to job losses and there are also concerns that reduced competition may push up energy prices for consumers.

Privatisation

The deal has also led to criticism of Mr Sarkozy, who said when he was Finance Minister in 2005 that he would not lower the government's stake in Gaz de France to below 70%.

Investors are hardly ever keen on a company with a stake controlled by the state Raimund Saxinger, Frankfurt Trust

The merger will mean the effective privatisation of GDF because the government will not own a majority stake in the merged group.

The Prime Minister, Francois Fillon, defended the deal.

"The public sector will have about 40% of the new group. Forty percent of GDF and Suez, I think that is better than 70 or 80% of GDF alone," he said.

But some analysts questioned the wisdom of a situation where the state would have an effective veto on key decisions.

"Investors are hardly ever keen on a company with a stake controlled by the state," said Raimund Saxinger, an investment manager at Frankfurt Trust.