Investors in International Power (IP) should consider two main points when examining a tie-up with GDF-Suez. Firstly, what is the upside to being part of the enlarged group? And, secondly, what compensation should shareholders receive for ceding control?
If the parties can agree, it's likely that GDF-Suez will pay cash for newly issued IP shares, thereby becoming the majority shareholder. In return for this privilege, the French utility will offer its international generation portfolio, comprising assets in the US, Canada, UK, Turkey, Brazil, Chile, Thailand and the Middle East. These assets complement IP's generation capacity in North America, Asia and the Gulf, while giving GDF-Suez access to the UK and Australian markets.
Bank of America/Merrill Lynch reckons this combination will create cost synergies in excess of £1bn from lower project bid costs, tighter office overheads and more economic outsourcing. But, most importantly, the deal would mean lower debt costs for IP as GDF's credit rating is better. Bank of America/Merrill Lynch estimates that the deal could enhance earnings by 10 per cent.
So, on a fairly superficial inspection, this clears the first hurdle - the enlarged group is certainly an interesting growth prospect. But if investors accept the deal, what price is reasonable for the issued shares? Analysts at both Citi and UBS think the price should be more than 400p, which reflects the fair value of IP's business, plus a premium for synergies and control. The fair value is calculated based on earnings multiples for the regional businesses and by applying a value per kilowatt capacity that each produces.
A 400p price would be a 35 per cent premium to the share price before the two companies first considered a deal back in January. This is rumoured to have fallen apart because GDF was unwilling to add a cash sweetener to the deal. Presumably, talks are now once again under way because GDF has changed its tune which implies a special dividend for IP shareholders.
