EDF might sit back and enjoy plaudits

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Pierre Gadonneix is a reassuring sort of figure.

A small, rather thoughtful character, the head of France’s EDF electricity group does not seem the type to let his ambitions run away with him.

So when EDF management faces shareholders on Friday at its annual investor day in London, there are unlikely to be any nasty surprises.

Indeed, EDF can even point to a few happy ones, the biggest being a near tripling of its share price since Europe’s biggest operator of nuclear power stations was floated just two years ago. In Nice, Mr Gadonneix will also finally announce a deal to give Italy’s Enel access to France’s nuclear power generation in return for eastern European capacity and the assurance that politicians will not threaten the French group’s Italian holdings. Then there have been deals to tap into the nuclear boom in both the US and, this week, in China.

Investors will no doubt applaud these initiatives, but in reality such moves may barely register with many.

The biggest question on Friday is likely to be just how long EDF expects the system of low regulated energy prices to persist in France. Accounting for about 61 per cent of revenues, the future of administered tariffs presents a bigger opportunity for EDF in the medium term than the myriad international nuclear prospects which are still a long way from being realised.

And here EDF may well disappoint the bulls that have been chasing valuations ever higher in the euphoria surrounding nuclear power.

Nicolas Sarkozy, French president, went on live television last night to address the growing public discontent over constraints on purchasing power, one of the biggest being high energy prices. So he will be in no mood either to boost or abolish low tariffs any time soon.

In the end, though, this may not matter too much. The tariff system gives the state-controlled group one big advantage in abnormally low prices that help to deter competitors. And, in the meantime, EDF remains highly cash generative and forecasts are for the group to eliminate its debt by 2010.

So perhaps the key question investors should be asking on Friday is where Mr Gadonneix, 64, will take the group in the final years before his mandate ends in 2009.

Some fear that he may be tempted to use the group’s restored balance sheet to head out on the acquisition trail again, and indeed EDF has still not used the budget for acquisitions it set at flotation in 2005.

But Mr Gadonneix may well do nothing. After all, says one senior insider, this approach has served the group well for the past two years. Analysts criticise EDF for not being as aggressive on cutting costs as international rivals. Yet with 40 per cent of its highly-unionised workforce due to retire in the next few years, why should it rock the boat?

Then Mr Gadonneix might ask himself why he should bother seeking out acquisitions. His past two international moves, in the US and China, followed deals by French state-owned company, Areva. The nuclear engineering group has been pushing its international expansion aggressively, and EDF has capitalised on some of Areva’s trail-blazing.

Indeed, Mr Gadonneix may even hope that his political masters will formalise the relationship by including his company in any eventual redistribution of Areva’s share capital – which could give his already buoyant shares an even bigger boost.

In fact, the relationship with the state may be EDF’s biggest advantage, even if Mr Gadonneix’s own rapport with President Sarkozy is often difficult. There have already been whispers that EDF’s lobbying for assets being sold as a result of the merger between Suez and state-controlled Gaz de France has not gone unheard.

Perhaps the message EDF investors should send to Mr Gadonneix on Friday is to simply sit back and wait. Any other strategy might mean courting risks that could shake that reassuring image.

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