Potential Engie stake increase: a look at the rationale and the numbers
SEV shares are up strongly today on speculation that Engie may be considering taking back control (from 33.5%
currently). Given Engie management has stated that SEV is non-core, this has come as a surprise: the stake was
widely seen until now as a candidate for disposal. In the absence of a denial from Engie (which has chosen not
to comment so far) we expect the speculation to sustain SEV shares at or above current levels, almost regardless
of valuation/fundamentals. A full takeover would be required under French law if Engie was to raise its stake
above 50% and given recent performance of SEV shares, this would not be immaterial from a leverage
perspective (we estimate +0.6x on ND/EBITDA if the deal was financed with debt). We expect Engie to
announce a substantial disposal programme at its CMD in Q2 2016, which could help free up capital for
reinvestment in focus areas (energy services, PPA generation and networks in growth markets). Buying out SEV
at a significant premium to the current price is unlikely to qualify as a priority for long term Engie shareholders,
and we see scope for disappointment if this was confirmed.
* Claims that Engie is looking at taking back control of SEV are surprising. La Lettre de l'Expansion
reported yesterday in a very brief article that Engie is looking to take back control of Suez Environnement,
which was partially spun off in 2009 as a pre-condition of the GDF/Suez merger. We see the source as
relatively credible and so far Engie has not formally denied the claim; as such we expect today’s share price
gains to be sustained and speculation to persist. That being said, the report comes as a real surprise – Engie
and Suez Environnement spent money and time splitting their operations and establishing separate brand
names; Engie management has publicly stated for a number of years that the SEV stake was non-core, as a
result this was widely seen as a disposal candidate. We would also note that Engie is accustomed to executing
complex M&A transactions; a leak on a transaction of such magnitude would also be quite surprising.
* Full takeover would be compulsory under French law. The French commercial code stipulates that a full
takeover is rendered compulsory if a company that owns between 30% and 50% of a listed entity increases its
stake by more than 1% over a period of 12 months (article 234-2). The Autorite des Marches Financiers
(AMF) may grant an exemption where a company that already owns between 30-50% increases its stake if it
intends to keep it as a long-term holding and doe not exceed the 50% threshold (article 234-5). As such, our
understanding is that Engie would not be able to increase its holding in SEV above 50% without launching a
full takeover offer.
* Running the numbers. Assuming Engie was to launch a full takeover offer for SEV funded with debt and
assuming a 20% premium to yesterday’s close (cash out €7.4bn), we estimate EPS accretion of 5-7% in 2016-
18E (based on a pre-tax cost of debt of 2.5%). The impact on leverage would be significant in our view, with
2016E ND/EBITDA increasing to 3.1x (Engie definition) versus 2.5x pre-acquisition which is also the
maximum leverage the company has long targeted. As such, should Engie decide to make a takeover for SEV
quickly (i.e. before significant disposals can be executed), we would not exclude a mixed offer (shares and
cash) or a partial rights issue to fund a cash offer, as was the case for International Power.
* We expect SEV shares to be sustained; on balance the read is negative read for Engie. If not denied, we
expect the speculation of a potential take over by parent Engie will sustain SEV shares at or above the current
level (almost regardless of fundamentals and valuation). That being said, the AMF may require a statement
from Engie at some point if the impact on SEV shares continues to be obvious. As for Engie, one could argue
the benefits of integrating SEV’s engineering business (Degremont), but we doubt investors will be won over
by the concept of returning to the early 2000s model of a “multi utility” offering. We believe investor interest
in Engie has been growing as the obvious remaining restructuring story among large European utilities,