Gaz de France merger runs out of steam

TOULOUSE -- The French government's 9-month drive to engineer a E78bn ($103bn, 52bn) merger of the country's national champion, Gaz de France (GdF), and the private utility group, Suez, has hit stalemate.

Responding to a legal challenge from trade unions, the French Constitutional Court has ruled that the merger can't happen before 1 July 2007, when the French household gas and electricity markets are opened to competition. The court's decision turned a French farce into a calamity for the government and for Gaz de France and Suez.

Because that date comes after the Presidential election the government will change before the merger can be consummated. There's no guarantee the new administration will be keen to reduce the government's controlling stake in GdF or approve the merger with its private sector partner.

The markets seem to regard this as good news. Shares in GdF and Suez have risen since the ruling and one of the best performers on the Euronext Paris market is rival energy group, Electricite de France (EdF), which is not involved in the merger.

Though strong energy prices underpin all three companies' shares, the enthusiasm stems from another ruling which told the government it must stop setting prices for homes in a competitive energy market.

As a sop to opponents of the merger, Prime Minister de Villepin, who personally unveiled the GdF-Suez plan in February, promised that the French government would retain price controls on gas and electricity even after the household market was liberalised.

That would have held down revenues at EDF, which is moving into the gas market, and GdF, which is aiming to become an electricity generator. Now all the suppliers will be free to edge prices up to free-market levels.

Thierry Breton, the Finance Minister, sweated blood to shepherd the paving bill for the privatisation of GdF, a necessary prelude to a Suez merger, through Parliament in a three-month marathon. He has now little to show for his efforts.

He insists de Villepin's administration will publish the privatisation decree and that the companies can continue merger plans and seek shareholders' approval in February.

But in reality, the decision probably puts Suez, capitalised at E46.5bn, back into play. Enel, the Italian power group, limbered up for a bid during the summer while financier Franois Pinault and a quoted private equity specialist, Wendel Investissement, have expressed interest in Suez's environmental services business, worth E18bn.

The prospect of a GdF-Suez combination looks to have passed.