Veolia, the largest provider of environmental services globally, has finally reached an agreement to acquire Suez, its main competitor.
This is a transformative deal that will allow Veolia to strengthen its presence across key activities spanning from water management to waste services.
Veolia started the Suez takeover in August 2020 when it acquired a 29.9% stake from French utility company Engie. However, Suez’s management and board had since been fighting hard against Veolia’s tender offer as they wanted to remain independent, which resulted in a complex and messy case.
Veolia had to make some concessions to win the deal, chiefly by rising its offer price (to €9bn for the 70.0% of Suez it does not already own) and eventually acquiring “only” two thirds of Suez. The objective is that the remaining assets – worth €7bn of revenue and €1bn of EBITDA – can still make a new independent Suez with new shareholders, which will be smaller but still large enough to compete internationally.
We have invested in Veolia’s EUR hybrid bonds issued as part of the Suez acquisition financing, which also includes additional debt and a rights issue (equity raise). We believe that the merger has obvious benefits given that the two companies are complementary and well aligned in terms of strategy. Veolia has already recovered above pre-Covid activity level, and should benefit from positive long-term trends in its key markets on top of synergies with Suez. The group has committed to its current financial policy of maintaining strong investment grade rating with the key leverage ratio of net debt to remain below 3x EBITDA, which is comforting for us as credit investors. Also, we think that the yield of 1.9% for the EUR hybrid callable in 2026 and 2.6% for the one callable in 2029 (>10x the yield of senior bonds maturing in 2028 yielding 0.2%) is attractive from a relative value perspective, for a solid credit profile set to further improve in the medium term.