* Stars aligned for a merger
Two years ago, SEV and Veolia ended brief merger discussions. Much has changed very recently,
while competitive pressure is mounting, particularly from Asian players. Antitrust was a key barrier;
we identify issues for c.12% of combined EBITDA, concentrated in France. New exit routes are
now open – an IPO of SEV’s stable water business looks feasible and valuations are attractive.
Alternatively, France’s new PM’s pro-industrial comments suggest possible political support. We
could see public vehicle CDC swapping its stakes in Veolia and SEV against Veolia France Water.
* Value creation from enhanced bidding, streamlined costs and optimized purchasing
We see up to 60% valuation upside from synergies in a bull scenario, while leverage should be
reduced sharply (2.3x adj. ND/adj. EBITDA by 2016e vs. 2.9x), providing scope for further
consolidation and/or improved shareholder remuneration.
* A timely opportunity for key shareholders
The transformational deal could appease key shareholders at Veolia after recent unrest, while
merging management could solve governance issues. GSZ is under increasing pressure from the
French watchdog to detach from SEV. If GSZ were to swap part of its 35% SEV stake for Veolia’s
Dalkia International, it could be a perfect exit ticket and reinforce its leading energy services
division (Cofely). SEV – Veolia may be GBL’s next project after accompanying Lafarge – Holcim.
* Merger case improves risk – reward: upgrade of both stocks by one notch
We lift our standalone EPS by 8% by 2016e on improved mid-term French waste prospects. Wage
moderation should help industrial production and profitability in France, while new cuts to social
contributions were announced last week. Standalone, we would value SEV at EUR15.5/s and still
see downside at Veolia (EUR13/s), notably linked to earnings risk. We believe it is now opportune
for management to revisit the merger case. Applying 50% of our base case synergy estimates
(25% to each company), we value SEV at EUR17.5/s (vs. EUR14 previously) and upgrade to
Outperform. We upgrade Veolia to Neutral, EUR15/s target price (vs. EUR12).