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Energy Giant

Anne Herrberg (jam)July 22, 2008

The merger of the French energy companies Gaz de France and Suez has created a national energy giant that is about to be floated on the stock exchange. But the merger has little to do with energy market liberalization.

Gaz de France HQ
Gaz de France and Suez's tie-up has created a French world player in energy -- but doubts persistImage: AP

French Finance Minister Christine Lagarde talked about a new "world champion" as she gushed about the new company which makes its stock market debut on Tuesday, July 22. With sales of nearly 75 billion euros ($118 million), it is the world's third largest gas and electricity provider.

The head of GDF-Suez, Gerard Mestrallet, spoke of the "biggest merger in France in 20 years."

Along with the French company Electricité de France (EDF), two of Europe's three biggest energy companies now hail from la grande nation -- and both have government backing.

That is a good thing, Finance Minister Lagarde has repeatedly insisted over the last few months, since it puts the company in a strong position at the negotiating table. For Europe's other energy giants -- Germany's E.ON, Russia's Gazprom and Italy's Enel -- the competition has just gotten a little tougher.

Fear of rising prices

French union members protest the privatization of Gaz de France in 2006
French union members protested the privatization of Gaz de France in 2006Image: picture-alliance/ dpa

While proponents of the merger see in it an important foundation of France's energy security, left-leaning parties and unions have protested. The approximately 200,000 employees of the new company worry about job cuts and steep hike in gas rates.

"Privatizations in the energy market have always led to lower quality and higher prices," said Jean-Francois Lejeune of the Force Ouvriere union. He said due to exploding crude prices, a double-digit price increase has been announced for the end of the year.

Outside the country, critics of the merger have accused France of protectionism.

"The energy market in France is very much a state affair," said Hubertus Bardt of the Cologne Institute for Economic Research.

Suez gas hub at Zeebrugge, Belgium
Suez gas hub at Zeebrugge, BelgiumImage: picture-alliance/dpa

The GDF-Suez deal has been in negotiations for a year and a half and, according to Bardt, it was not sealed only on its market strengths. Rather, the French government pieced it together in early 2006 to keep it in French hands.

Then, Italy's Enel had its eyes on Suez, which did not please many in Paris. The French government, which currently has almost 80 percent of Gaz de France stock, would have lost its majority.

Intervention à la Sarkozy

The GDF-Suez merger was Paris' way of "getting Suez out of the line of fire," according to Bardt. But to keep Suez from becoming the dominant player within the new company, the water and waste division, Suez Environment, had to be spun off and will be floated separately on the stock exchange.

For that to happen, though, French President Nicolas Sarkozy had to get personally involved. Last Monday, July 14, Suez chief Mestrallet -- once the most strident critic of the spin-off -- began to praise the deal and the government kept its 35.6 percent share and with it, a blocking minority.

EU setback

Suez Chairman and CEO Gerard Mestrallet, right, with GDF Chairman and CEO Jean-Francois Cirelli in 2006
Suez Chairman and CEO Gerard Mestrallet (right) with GDF Chairman and CEO Jean-Francois Cirelli in 2006Image: AP

Seen in the light of Brussels' plans to liberalize the EU internal market, analyst Bardt sees the deal as a setback. The basic principle of the EU economic policy -- more competition, especially across borders -- has been undermined in his opinion.

"The trend towards protecting markets is accelerating, particularly in southern Europe," he said.

EU parliamentarians have also looked warily at the plan. "We will carefully watch whether the French are involved in protectionist measures," the conservative CDU party's energy spokesman, Herbert Raul, told the Die Zeit weekly.

EU -- too slow and too quiet

This new French energy giant will stir memories of recent activity on the Spanish market, especially to German energy giant E.ON, whose attempt to take over Spain's Endesa failed. While in the end, Italy's Enel and Spain's Acciona torpedoed the plan, the Spanish government tried to prevent the move from the outset. It preferred a merger within its own borders.

At the time, things got tense between Spain and the EU Commission, which had already given a green light for the takeover by E.ON. Even a breach-of-contract complaint, which Brussels filed in the case, could do nothing to save the deal.

"They simply waited too long," said Bardt, while events on the ground went forward. He called on the EU to defend the EU's economic guiding principles most vociferously, and faster.