How French regime sealed takeover of British utility giant
Turning International Power into a global leader should have been straightforward – instead it became a drama
Sunday 15 August 2010
International Power chairman Sir Neville Simms had no qualms about his company being taken over when Gérard Mestrallet, the head of the French utilities giant GDF Suez, came knocking last autumn.
A decade ago Simms shocked the building materials industry when he negotiated Tarmac's takeover by mining giant Anglo American.
And his board had no concerns with a foreign bidder taking control of the British energy group: non-executive directors Tony Isaacs and Alan Murray were both chief executives who sold FTSE companies to German bidders, BOC going to Linde and Hanson to Heidelberg Cement.
Simms readily accepted the argument Mestrallet spelt out for combining the French power business with his own, an electricity generation company that was privatised 20 years ago as part of the Thatcher economic revolution. With sales of £70bn, GDF Suez's revenues far exceed International Power's turnover, but both companies operate globally: where they overlap there was scope to cut out the fat and where they do not, merging would widen their worldwide coverage.
But what should have been a straightforward deal to create a global powerhouse with a $114bn revenue has taken 10 months to reach agreement, with a memorandum of understanding announced last week. Senior French and British politicians, the spectre of foreign ownership, and profit-motivated shareholders have combined to create one of the most complicated behind-the-scenes deals in years. Early talks concentrated more on fitting together the businesses than the financial details. However, Mestrallet was not proposing a simple takeover of International Power like the stream of cash bids that have delivered many other British utility companies into foreign hands: he wanted to inject a large part of GDF's operations into the UK group in return for a majority stake in Simms's company.
But if Mestrallet had to reach a deal with Simms, he also had to negotiate with his main shareholder – the French government. GDF is 35 per cent owned by the state and the Minister for Economic Affairs, Christine Lagarde, must personally sanction any sale of any assets considered strategic to her country. She was concerned not only that a bid for International Power could dilute the government's stake in GDF's energy business, but also at the national humiliation if the bid failed.
In fact, the attempted bid was scuppered by the UK Listing Authority. When news of the takeover talks leaked in January, this wing of the Financial Services Authority demanded that details be announced to the stock market. But despite months of talks, Simms was not ready to do so.
Because any offer would be a reverse takeover – International Power was worth about £5bn but acquiring assets worth three times that– the listing watchdog insisted dealings in its shares be suspended until Simms was ready. He refused. Suspensions are frequently associated with bad news and investors might have been unable to deal for weeks while terms were argued over. An announcement was thus made to the market – that the talks were off.
Having said they were off, however, they had to stay off. The listing agency imposed what the City calls a "pens down" that prevents any discussions. But behind the scenes, Mestrallet and his team looked for ways to revive the deal. Bankers at Rothschild were already working on the planned merger; over the spring, GDF also brought in Ondra Partners of Belgium and Blackstone, the US private-equity adviser.
"People assumed that both companies were talking, but they were not," says one adviser. "There was genuine radio silence for a period of time."
Another bid was making the headlines during the spring, however: Kraft's offer for Cadbury. Two decades ago, when International Power – then called National Power – was privatised along with the rest of Britain's electricity industry, the dominant French government stake would have made GDF's proposed takeover subject to the "Lilley Doctrine" – the policy of Conservative trade secretary Peter Lilley to block back-door nationalisation by bids for British companies from foreign state vehicles. Now a new generation of politicians had to be assuaged as former trade secretary Lord Mandelson threatened special rules to deter overseas offers.
But the "pens down" prevented GDF from amalgamating its figures with Simms's to see how a combined business would look. Not until June did GDF's brokers devise a route to allow preliminary discussions on swapping information with International Power's advisers at JP Morgan Cazenove, Morgan Stanley and Nomura. That allowed Mestrallet to reopen talks with Simms.
Deciding which assets to inject was the easy part: GDF wanted to keep its Continental business outside the deal and Simms, having shunned nuclear generation in his own company, had no wish to take on that side of Mestrallet's business. That meant GDF would add 33 gigawatt gross generating capacity to International Power's 34GW.
The fit was as good as it had seemed last year: in North America, both companies have about 7GW, slightly less than each has in the Middle East, while both have about 5GW in Asia. GDF generates 11GW in Latin America where Simms's group has nothing, but the French company has only GW of UK output to International Power's 11GW.
Valuing the assets was a negotiating point, but Simms also brought up a subject avoided in the original talks – a payment to his 380,000 shareholders, many of them investors since it was privatised as part of National Power in the early 1990s. Mestrallet had hoped for a no-premium merger involving no cash. Other sticking points involved the size of GDF's stake in the UK company, how much debt it injected beside the assets, and how many directors it appointed. Philip Cox, Simms's chief executive, led the detailed discussions.
As negotiations progressed, Simms met Vince Cable to test the British government's reaction while Mestrallet kept Lagarde informed. Still concerned with the damage to France's reputation if the offer floundered, she insisted the deal must be a fait accompli before its announcement.
The final terms were thrashed out last Sunday night in Paris. In the end, GDF will have 70 per cent of International Power and it will appoint the chairman with Simms his deputy: there will be six GDF directors and three from the UK company. The debt transfer is £3.75bn, but GDF agreed a £1.4bn cash payment to shareholders.
That 92p a share special dividend compensates investors for losing control, says Cox, who will continue running the company. The enlarged group will retain its London listing. While International Power's shareholders will be a minority, they will share in future profits, he argues. Cox estimates the cost savings at £165m by 2016 but with three-quarters of that showing within two years. Implementing them will cost £130m but GDF's backing will reduce the cost of International Power's existing debt. He calculates the savings at £65m a year.
After the deal was announced last week, the major credit rating agencies signalled that International Power's borrowings could be uprated to investment grade – while GDF's may be downgraded. "We expect to be investment grade from the word go'," says Cox. "Frankly, it's hard to overestimate the importance of this. It's a real and significant advantage."
But that French government stake in International Power's new owner still worries some. Six government directors sit on GDF's board; by law, Lagarde's department must own 33 per cent and a "golden share" protects the state interest. And if she can control GDF, Mestrallet clearly sees International Power as wholly his.
"As a result of this transaction, GDF Suez will achieve its strategic objective of 100GW in operation and strengthen its worldwide leadership in power generation," he says, already including the listed UK company in an empire that is now the world's largest utility group – overtaking French rival EDF.
Dirk Beeuwsaert, the Belgian GDF executive who will take Simms's chair at International Power, admits: "International Power is a listed company so we'll be doing things at arm's length. On the other hand, we'll examine more in detail what can be done to increase international efficiency as a whole."
Might Mestrallet one day try to buy 100 per cent control of the British company? The past year has proved he is a patient and determined negotiator. His offer document will include a standstill agreement preventing GDF from increasing its holding for two years and stopping the stake from being diluted. After that, International Power must hope GDF finds it more useful to have a London-listed vehicle than to buy back the assets Mestrallet has just swapped – but still controls.
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