June 7, 2012 8:12 pm

GDF still trying to shake off utility image

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Gérard Mestrallet

Gérard Mestrallet has a fervent wish: that people stop thinking of GDF Suez as a utility.

In an interview to mark the final approval of his company’s £6.4bn payment for full ownership of Britain’s International Power, Mr Mestrallet, GDF’s chief executive, insists: “We no longer belong to that category.”

It is a surprising statement given that GDF still makes much of its profit from heavily regulated utility businesses in its home markets of France and Belgium.

But Mr Mestrallet would prefer that the company was fully recognised for the rather better growth prospects of its non-European power generation, energy services and liquefied natural gas operations, particularly in emerging markets.

This is what has encouraged him to pay a generous price for the 30 per cent of International Power that GDF does not own already, barely more than a year after it acquired 70 per cent of the British company.

In the first deal, GDF injected its non-European assets into International Power in exchange for control, creating in the process the world’s biggest independent power producer. It left the company with a separate London listing, hoping that this would showcase the growth assets owned ultimately by the parent.

But, Mr Mestrallet says, he ended up instead with “two stocks, and those investors who were wanting the benefits of growth in emerging markets were choosing International Power. In future they will have only one.”

‘Kaleidoscope’ of policies hurting competitiveness

Gérard Mestrallet, chief executive of GDF Suez, has accused Europe’s political leaders of giving “zero” consideration to the competitiveness of their industrial companies when deciding energy policy.

Mr Mestrallet, one of Europe’s leading energy sector executives, said EU governments were operating a “kaleidoscope” of different policies based largely on their different responses to events such as the Fukushima nuclear disaster in Japan and the sovereign debt crisis.

He accused them of failing to anticipate and respond to the burgeoning industrial renaissance in the US, which is based in part on manufacturers’ access to cheap shale gas, and the willingness of emerging economies to act together to secure energy supplies.

The comments from the head of GDF, the world’s largest independent power producer, come at a critical moment for Europe’s governments as they struggle to encourage growth to escape from the recessionary impact of the sovereign debt crisis.

Industrialists argue that keeping down the cost of energy is vital if they are to compete globally.

“Europe has put enormous emphasis on climate change, which is clearly important, but they have not given much consideration to security of supply,” Mr Mestrallet said.

The difficulty is that even now, with full ownership assured, the stock market will still not budge from its view of GDF as just another big European utility struggling with regulated pricing regimes. “Globally it is one of the worst markets to be in,” Mr Mestrallet says.

Even as International Power’s shareholders voted overwhelmingly in favour of GDF’s purchase on Thursday, the French company’s shares fell 1.4 per cent to €16.15 – meaning they have fallen 34 per cent in a year, roughly in line with European peers.

For Mr Mestrallet, the perceived failure by markets to recognise what makes his company different is a source of frustration. “When we first agreed to buy the other 30 per cent of International Power our shares jumped 6 per cent in two days. But since then we’ve been put back in the box of the European utilities.”

As evidence of how far he believes his company is undervalued he points to a €3bn bond issued by GDF last week, which offered 1.83 per cent of interest. By comparison the company’s shares are yielding 8.5 per cent.

He also points to GDF’s commitment to invest heavily in Asia, the Middle East and South America. Of expected annual capital spending of €9bn-€11bn in the next five years, as much as half will be spent in developing markets – up from 30 per cent now.

To pay for the International Power deal – Europe’s largest merger and acquisition transaction this year after Glencore’s $67bn purchase of Xstrata, the mining group – GDF has promised another €3bn of asset sales, on top of a €10bn disposal programme that is almost complete. But Mr Mestrallet stresses only assets in mature, largely European, markets will be sold.

He says that GDF will now concentrate on organic growth and the full integration of International Power, but he does not entirely rule out more deals. “Of course, I will never say that now the M&A period is definitely closed,” he concludes. “But we do now have the critical size and we don’t need additional operations.”

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