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

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.

Arts and Entertainment
Joel Edgerton, John Turturro and Christian Bale in Exodus: Gods and Kings
film Ridley Scott reveals truth behind casting decisions of Exodus
footballArsenal 2 Borussia Dortmund 0: And they can still top the group
Arts and Entertainment
An unseen image of Kurt Cobain at home featured in the film 'Kurt Cobain: Montage of Heck'
filmThe singers widow and former bandmates have approved project
Andy Murray with his girlfriend of nine years, Kim Sears who he has got engaged to
peopleWimbledon champion announces engagement to girlfriend Kim Sears
Arts and Entertainment
Jake Quickenden and Edwina Currie are joining the I'm A Celebrity...Get Me Out Of Here! camp
Arts and Entertainment
George Mpanga has been shortlisted for the Critics’ Choice prize
Albert Camus (left) and Jean-Paul Sartre fell out in 1952 and did not speak again before Camus’s death
Arts and Entertainment
Roisin, James and Sanjay in the boardroom
tvReview: This week's failing project manager had to go
ebooksNow available in paperback
Ed Miliband visiting the Holocaust museum in Jerusalem. The Labour leader has spoken more openly of his heritage recently
newsAttacks on the Labour leader have coalesced around a sense that he is different, weird, a man apart. But are the barbs more sinister?
Arts and Entertainment
'Felfie' (2014) by Alison Jackson
photographyNew exhibition shows how female creatives are changing the way women are portrayed in advertising
Life and Style
Fright night: the board game dates back to at least 1890
The vaquita is being killed by fishermen trying to catch the totoaba fish, which is prized in China
environmentJust 97 of the 'world's cutest' sea mammals remain
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Langley James : IT Support; Helpdesk, VMware; Manchester, £18k

£16000 - £18000 per annum: Langley James : IT Support; Helpdesk, VMware; Manch...

h2 Recruit Ltd: Business Development Manager - HRO - £70k+ ote

£35000 - £450000 per annum + £3k car, £70k ote: h2 Recruit Ltd: Do you want to...

Citifocus Ltd: Newly Qualified Accountants - Risk Mgmt

£Attractive Package: Citifocus Ltd: Prestigious financial institution seeks to...

Citifocus Ltd: Operational Risk Analyst

£Negotiable: Citifocus Ltd: Experienced operational risk professional with ban...

Day In a Page

Cameron, Miliband and Clegg join forces for Homeless Veterans campaign

Cameron, Miliband and Clegg join forces for Homeless Veterans campaign

It's in all our interests to look after servicemen and women who fall on hard times, say party leaders
Millionaire Sol Campbell wades into wealthy backlash against Labour's mansion tax

Sol Campbell cries foul at Labour's mansion tax

The former England defender joins Myleene Klass, Griff Rhys Jones and Melvyn Bragg in criticising proposals
Nicolas Sarkozy returns: The ex-President is preparing to fight for the leadership of France's main opposition party – but will he win big enough?

Sarkozy returns

The ex-President is preparing to fight for the leadership of France's main opposition party – but will he win big enough?
Is the criticism of Ed Miliband a coded form of anti-Semitism?

Is the criticism of Miliband anti-Semitic?

Attacks on the Labour leader have coalesced around a sense that he is different, weird, a man apart. But is the criticism more sinister?
Ouija boards are the must-have gift this Christmas, fuelled by a schlock horror film

Ouija boards are the must-have festive gift

Simon Usborne explores the appeal - and mysteries - of a century-old parlour game
There's a Good Girl exhibition: How female creatives are changing the way women are portrayed in advertising

In pictures: There's a Good Girl exhibition

The new exhibition reveals how female creatives are changing the way women are portrayed in advertising
UK firm Biscuiteers is giving cookies a makeover - from advent calendars to doll's houses

UK firm Biscuiteers is giving cookies a makeover

It worked with cupcakes, doughnuts and macarons so no wonder someone decided to revamp the humble biscuit
Can SkySaga capture the Minecraft magic?

Can SkySaga capture the Minecraft magic?

It's no surprise that the building game born in Sweden in 2009 and now played by millions, has imitators keen to construct their own mega money-spinner
The King's School is way ahead of the pack when it comes to using the latest classroom technology

Staying connected: The King's School

The school in Cambridgeshire is ahead of the pack when it comes to using the latest classroom technology. Richard Garner discovers how teachers and pupils stay connected
Christmas 2014: 23 best women's perfumes

Festively fragrant: the best women's perfumes

Give a loved one a luxe fragrance this year or treat yourself to a sensual pick-me-up
Arsenal vs Borussia Dortmund: Alex Oxlade-Chamberlain celebrates century with trademark display of speed and intuition

Arsenal vs Borussia Dortmund

The Ox celebrates century with trademark display of speed and intuition
Billy Joe Saunders vs Chris Eubank Jnr: When two worlds collide

When two worlds collide

Traveller Billy Joe Saunders did not have a pampered public-school upbringing - unlike Saturday’s opponent Chris Eubank Jnr
Homeless Veterans Christmas Appeal: Drifting and forgotten - turning lives around for ex-soldiers

Homeless Veterans Christmas Appeal: Turning lives around for ex-soldiers

Our partner charities help veterans on the brink – and get them back on their feet
Putin’s far-right ambition: Think-tank reveals how Russian President is wooing – and funding – populist parties across Europe to gain influence in the EU

Putin’s far-right ambition

Think-tank reveals how Russian President is wooing – and funding – populist parties across Europe to gain influence in the EU
Tove Jansson's Moominland: What was the inspiration for Finland's most famous family?

Escape to Moominland

What was the inspiration for Finland's most famous family?