Fixed Income Analysis /
France

Sector Flash - Utilities: Smart agreement between Veolia and Suez justifies higher bid

    Ulrich Scholz
    Ulrich Scholz

    CFA, FRM - Telecoms, Technology

    UniCredit
    12 April 2021
    Published by
    • Agreement reached between Veolia and Suez will allow the merger of the two groups: In their press release from this morning, Veolia and Suez announced that they have reached an agreement on the key terms of the merger between the two groups. Veolia will pay a price of EUR 20.5 per Suez share including dividend, which is around 14% above Veolia’s original bid of EUR 18/share. While the agreement supports Veolia’s industrial plan to create a global champion in the environmental and water segments, it would also allow the creation of a new Suez.
    • Increased bid will have limited impact on Veolia’s leverage: The price of EUR 20.5 per Suez share implies a total purchase price for the 70.1% of Suez’s equity not yet held by Veolia of around EUR 9.18bn, which is EUR 1.12bn higher than Veolia’s original bid. Based on an original pro forma EBITDA estimate of around EUR 5.46bn for the combined group, we estimate the increased bid will have an impact on Veolia’s pro-forma leverage of around 0.2x. Given the high synergy potential of Veolia’s industrial plan, we think the higher bid is justified.
    • The agreement provides for the creation of a new Suez: The parties propose the creation of a new Suez, with revenue of around EUR 7bn. The proposal suggests that a new Suez would be owned by a group of shareholders including financial partners from both groups and by employees. Given Veolia’s earlier plans to sell certain assets to Meridiam and Suez’s earlier proposal to involve the financial investors Ardian and Global Infrastructure Partners (GIP), we expect these investors to be among the shareholders of the new Suez. However, from a transactional point of view, we think the creation of a new Suez will come in the form of asset sales after the acquisition of Suez by Veolia. Against this background, we expect Veolia will be able to limit any deviation from its original industrial concept.
    • VIEFP hybrid-bond spreads look attractive now that the deadlocked situation has been resolved. VIEFP hybrids are trading around 70bp wider than the iBoxx UTI Sub index. While this fairly reflected the uncertainties before today’s agreement, we think VIEFP hybrids look attractively priced now and we assume that a majority of Suez shareholders will also accept the higher bid. We are changing our recommendation on VIEFP bonds to overweight from marketweight. Regarding to the SEVFP hybrids, with uncertainties regarding Suez’s future shareholder structure if the Veolia bid were to fail gone, SEVFP hybrids, which are still trading slightly tighter, should move to trade in line with VIEFP hybrids. Against this background, we are changing our recommendation on SEVFP bonds to marketweight from underweight.