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How the Desmarais family clinched its power play Add to ...

The blockbuster merger of Suez SA and Gaz de France SA, formally announced yesterday, has put Montreal's billionaire Desmarais family at the centre of the world's third-largest power utility.

The family's impeccable investment and political connections paid off: The Desmarais got there with a little help from their friends - Albert Frère, their European partner and agent, and none other than Nicolas Sarkozy, the new President of France.

GDF-Suez, as the new company is to be called, will have a market value of €90-billion - the equivalent of $130-billion - and will count Groupe Bruxelles Lambert (GBL) among its top shareholders. GBL is the Brussels investment company ultimately controlled by the Desmarais family, through their Power Corp. of Canada empire, and Groupe Frère Bourgeois, where Mr. Frère and son Gérald reign supreme.

At last count, GBL held a 9.5-per-cent equity stake, and 13.2 per cent of the votes, in Suez. Those stakes will be diluted by half in the roughly one-for-one share swap merger with Gaz de France. But the enlarged company, which will be 35 per-cent owned by the French state, will have the market and industrial presence to qualify as a "global energy leader," the companies said in a press release.

Suez is one of Europe's biggest sellers and traders of natural gas and electricity. Gaz de France, owned 80 per cent by the French state, is Europe's biggest gas network operator. Together they will have annual revenue of €72-billion. GDF-Suez will rank as Europe's top buyer and seller of gas and will own the continent's biggest gas transmission and distribution businesses. It will be the global leader in liquefied natural gas (LNG), the fastest-growing energy sector.

In the power industry, only OAO Gazprom, the Russian gas producer, and Electricité de France, the state-run operator of 58 nuclear reactors, will be bigger.

Mr. Frère, who is chairman of GBL and vice-chairman of Suez, has been one of the biggest advocates of the Suez-Gaz de France merger. The deal was announced 18 months ago as a defensive measure; the Italian utility Enel had made a hostile offer for Suez (though Suez and Gaz de France had secretly contemplated a union for years). It immediately ran into political and valuation problems and was declared moribund several times.

Politically savvy French investors knew no progress would be made until the May French election was out of the way.

Over the summer, negotiations reopened among Suez, Gaz de France and the Mr. Sarkozy's government. The President reportedly was in favour of the merger but only if Suez were to spin off its hefty environmental arm, whose businesses operate water treatment plants and waste services. The spinoff, resisted by Suez, would reduce Suez's valuation. This would put it roughly on par with Gaz de France's, allowing a true merger of equals.

The Financial Times reported yesterday that a phone call to Mr. Sarkozy from Mr. Frère in the past few days helped to break the impasse. The exact nature of the discussion is not known. But the timing of the merger announcement suggests the phone call and meetings with other key Suez shareholders, including Areva, the French nuclear reactor builder, built momentum for the deal. In the end, Suez, as Mr. Sarkozy wanted, agreed to spin off 65 per cent of the environmental business to Suez shareholders.

Power Corp. was not available for comment on the Labour Day holiday. It is not known whether the Desmarais family got involved in the discussions with the government. Paul Desmarais Sr., the chairman of Power Corp.'s executive committee, and sons Paul Jr. and André know Mr. Sarkozy. The President reportedly has gone to the Desmarais' Charlevoix estate in Quebec for private holidays.

As the family's point man in Europe, it is more likely the Desmarais family let Mr. Frère handle the merger negotiations. Mr. Frère is one of the most powerful businessmen in Europe and has had a close relationship with Paul Sr. since the late 1970s, when the two men each had minority investments in Paribas, a French investment bank. Since then, they have created one of Europe's top industrial holding companies.

GBL has investments valued in the billions of dollars. As of the end of July, they included 3.9 per cent of Total, the French energy giant, 26.3 per cent of Imerys, a minerals processing company, 17.3 per cent of Lafarge, the world's biggest cement and building materials company, and 6.2 per cent of Pernod, the second-biggest wine and spirits business. Last year, GBL had adjusted net assets of €16.7-billion.

The Desmarais and Frère families have ambitious goals as investors and being passive isn't one of them. The stated goal of Pargesa, the holding company directly atop GBL, is the creation of long-term value and "to exercise control, or major influence, over the companies in which the Group holds interests."

Already, there is speculation that GDF-Suez, backed by the French government, GBL and the other powerful shareholders, will embark on an acquisition spree after the merger closes next year. Analysts think takeovers are inevitable, if only because the new company will have relatively little debt.

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