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This $3.4 Billion Suez Crisis Looked Avoidable

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(Bloomberg Opinion) -- Shareholders of French utility Suez SA, whose specialty is drainage, waste management and water treatment, know when something doesn’t smell right.

It’s been several weeks since rival Veolia Environnement SA launched a bid to buy a 30% chunk of Suez from state-backed utility Engie, opportunistically exploiting a depressed Covid-19 valuation. Suez’s justified outrage at this move, which would put Veolia boss Antoine Frerot in pole position to swallow the entire company, hasn’t been backed up by a convincing alternative, however. Worse, Suez’s increasingly desperate antics are spooking its own investors, who sent the stock down as much as 5.2% on Thursday.

The trigger for the sell off, which left Suez’s shares trading further below Veolia’s 15.50 euro bid, was the announcement of a poison-pill tactic designed to deter Frerot for good. Veolia publicly earmarked the sale of Suez’s French water business to pacify antitrust authorities in the event of a full takeover. So Suez has moved to put that asset out of reach by enacting a defense known as “the crown jewels.” The plan is to create a Dutch foundation that would own a symbolic but powerful piece of the division, ensuring it isn’t split from the group.

As a defense designed to make Suez unbuyable, it’s hardly watertight. Steelmaker Arcelor tried, and failed, something similar in 2006 to fend off Lakshmi Mittal — though it did attract a higher bid. Suez’s plan could be reversed if the board, which currently includes two Engie representatives, got a sufficiently attractive offer. Veolia is unlikely to see this on its own as a deal breaker.

But as a message to the market, and to a French government caught in the middle of a bitter corporate bust-up, it’s an absolute disaster. Suez is placing one of its most sought-after assets out of reach of its own minority shareholders — who don’t even get a vote — all while claiming it’s doing so for the integrity of the business. This stance of total opposition also ignores the reality that Engie has signaled it could be a willing seller at a higher price.

Suez investors were already exasperated with years of underperformance. This is hardly going to make them more supportive. The decline in the shares can be seen to reflect the reduced chance of a successful takeover, as well as a vote against a management team behaving in a way investors regard as contrary to their interests.

All other things being equal, Suez’s clumsy defense move should not be a big setback for Frerot. But Suez has at the least made any deal more complex, and Veolia may now have to offer trustbusters alternative disposals, such as its own water unit, reckons Adrien Dumas, a fund manager at Mandarine Gestion.

Frerot is no longer on the front foot. He has stuck to ungenerous bid terms for too long and allowed a bad mood to fester. The momentum of his campaign is stalling.

Veolia is now conceding that it may raise its offer for the Engie stake. It would have been better to make a knockout bid for that from the start — or sweeten very quickly. It’s not too late for Frerot to do that, but he’s squandered the chance to get a deal done cleanly. This is one Suez crisis that could have been avoided.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Lionel Laurent is a Bloomberg Opinion columnist covering the European Union and France. He worked previously at Reuters and Forbes.

Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

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