Acquisition of International Power in the UK by Gaz de France - Report Example

Acquisition of International Power in UK by Gaz de France Executive Summary This is a comprehensive report that critically analyses the acquisition and otherwise merger between International Power, a United Kingdom based company and Gaz de France, based in France. Mergers have been one of the most effective options for companies seeking growth and expansion. This is because merger has the potential of ensuring rapid and speedy turnovers in terms of the revenue, market size customer base and physical infrastructure of a company. This however does not mean that mergers are free from challenges. In this report, it was not the merits of the merger between International Power and Gaz de France that are reviewed but also any challenges that the companies involved must look out for. This is preceded with a detailed description of both companies. This description is very necessary for this report because it is only after having a detailed understanding of the companies involved, their history, their mission and vision, their strategic plans, and of course their projected growth rate that the merger that has taken place can best be analysed in the interest of both companies. Comprehensive macro analysis is also conducted for both companies as this is also necessary in judging the economic viability of the merger. Finally, there is a detailed scrutiny of the valuation of the merger. The valuation was done in comparison with not only the macro economic factors outlined earlier but with other micro economic factors such as project depreciation rates, projected inflation rate and projected interest rates are concerned. Concluding, suggestions are made for the companies as to how they can ensure maximisation of the economic stand they have taken and the economic journey they have just began. Brief description of both companies International Power has been one of United Kingdom’s power houses when it comes to established and flourishing businesses. The company was commissioned in 2000 following a demerger by National Power. Since that time, the company’s performance has seen it being listed on the London Stock Exchange and FTSE 100 Index. The Guardian (2012) notes that International Power has attained a sustained growth rate on the various stock markets. The graph below is a clear indication of the success rate of the company on the London Stock Exchange. Source: The Guardian (March, 2012) Clearly, International Power is an appreciating company when it comes to revenue. The company’s basic business is in power generation. As a power (electricity) generation company, International Power has been touted to have the capacity of producing a gross of 72,360 megawatts of power and a net production of 42,225 megawatts of power (International Power, 2011). This makes the company a global leading competitor in the power generation industry. Gaz de France Suez also has a very good history and operational background. Operationally, both GDF Suez and International Power are in the power generation sector. Additionally, GDF Suez goes beyond power distribution into the distribution of power, generation of natural gases, and also into the generation of renewable energy for its numerous clients around the world. Before the year 20008, the company was simply known as GDP or Gaz de France because it had not merged with Suez Environment, the company in which Gaz de France has up to 35% market stake in. Due to the continuing market urge of the company, it is listed on a number of stock markets including the Euronext Exchanges. The company continues to undertake massive growth and expansion activities including the constructions of “a gas-fired combined cycle power plant of at least 1,500MW and an associated water desalination plant with a capacity of 102 to 107 MIGD (464 to 486 thousand m³/day)” (GDF Suez, 2012). Macro Analysis The macro economic indicators of companies go long ways to influence, inform and affect their decisions and policies on growth and expansion. Knowing that Gaz de France’s merger with International Power was a strategic growth and expansion move, the macro analysis shall be done in relation to how the indicators reflect on the viability and validity of the merger that took place. The first macro indicator to refer to is the countries of operation of both companies. Though both companies have coordinating sub-national offices, the parent countries shall be used. Knowing that macro analysis encompasses several aspects of the country in which a company operates, the macro analysis shall briefly be broken into a PEST analysis for both countries namely United Kingdom for International Power and France for Gaz de France. The analysis shall be comparative, comparing the same item on the PEST for the two companies (countries). Politically, the United Kingdom government looks up more unto businesses and companies to support the overall economy of the country. Because of this, the government imposes huge taxes; in some cases over 50% to ensure that monies that go to companies come back into the larger economy. There are also limitations on the kind of support companies could get from government’s financial institutions (Gardener, 2001). The implication of this to International Power is that the company has to look without its immediate environment to generate consolidated revenue. This way, international mergers and foreign direct investment are advised. For France, there are lots of efforts by government to make the private sector the engine of growth (Koduah, 2001). Because of this, the government does well to pump a lot of resources into the private sector through reduced taxations and accessibility to loans. The implication for Gaz de France is that if the company concentrates on local direct investment, the company can be assured of massive growth. Environmentally, the United Kingdom has certain advantages over France when it comes to environmental conditions such as economic growth, interest rates, and exchange rates. It is only in terms of taxation changes that France could be said to be better than the United Kingdom. In terms of inflation, both countries could be said to be at par. Inferably, International Power should be engaged in more cross border businesses since the strength of the country’s currency would result in a lot of returns on foreign exchange. For Gaz de France, the company is advised to stay away from countries where taxations may be higher than prevails in France and where the company would be at a loss in terms of exchange rate differences. Socially, the United Kingdom and France could be said to have a lot in common. This is particularly influenced by the fact that both countries are in the European Union Cultural Zone and that the social trends in both countries seem very identical. Considering the business orientation of the two countries, it can be said that social trends that are directed towards the use of electricity would do the companies a lot of good. As far as this point is concerned however, Gaz de France seems to have s slight advantage over International Power. This is said against the backdrop that the continuous global advocacy for the use of alternative power supply (renewable power) favours GDF a lot since that company is into renewable natural resources, which International Power is not. Technologically, the Oxford University Press (2007), note that “new technologies create new products and new processes. MP3 players, computer games, online gambling and high definition TVs are all new markets created by technological advances.” Interestingly, these technological advancements call for the use of electricity. Imperatively, both companies are at an advantage of benefiting from growing expansion of technology and technological advancement. These technological advancements are also to the benefit of the functioning and operations of the companies. Brief Description of the Transaction It has already been indicated that the transaction of a merger between International Power and Gaz de France was necessary for growth and expansion purposes. This is not the first time that merger has been used for such a purpose since the essence of mergers is essentially towards that direction. An important component of this merger is that it is a reverse takeover. Reverse mergers have some degrees of mutual benefiting. It is in line with this that the Investopedia (2012) explains reverse takeover is “a type of merger used by private companies to become publicly traded without resorting to an initial public offering.” This means that GDF Suez Energy as a public company (knowing that 35% of the company is owned by the State) bought enough shares of International Power. The total percentage of shares traded from International Power to Gaz de France Suez Energy is quoted as 70%. Since the government of France is the largest shareholder of Gaz de France Energy, it is clear that International Power can now be described as a public company that has successfully switched status from private to public without undertaking any initial public offer. Analysis of the reasons, motives, strategies and process The first major economic feature of the newly created company is that the company has now gained firmer global representation. This is said because according to Ruddick (2012), the new company will now not be restricted only to the United Kingdom and France but would expand as far as to Latin America, North America, Europe, the Middle East, Asia and Australia. The reason for such expansion is that the two companies as individual companies had representations in those economic territories. As a reason for the merger therefore, it can confidently be said that the merger was necessary to build an expanded market base. There is also the reason of increasing market revenue. Knowing that both companies were already performing creditably on their individual Stock Markets, it would be true to argue that the revenue expansion that came with the transaction was in multiples. In this direction, a revenue base of £70bn was tagged to the new company upon the merger (Ruddick, 2012). This is indeed a major motivation to push any company into taking the decision of the merger. Having discussed the macro analysis above, it would also be right to think that the merger was effected as a means of gaining macroeconomic balance. Indeed, the macroeconomic climate in the United Kingdom is totally different from what exists in France. This way, the companies deemed it strategic to balance whatever differences to come to an economic equilibrium. Indeed the equilibriums worked out as “GDF reported a 9pc rise in net profits to €3.6bn (£3bn), boosted by a cold winter that pushed power consumption higher” (Ruddick, 2012). Valuation Valuation of the transaction was an important component of the entire transaction. This is especially because the process had gone through a bidding process. In this case, both International Power, which was off loading share and Gaz de France had a lot of research work to do to ensure that they did not become losers on the deal. It is not surprising that earlier attempt to get the deal through failed. After careful valuation of the transaction, shareholders of International Power valuated to sell off 70% of their shares to Gaz de France. An expertise valuator put the value of a share to be traded at 92 pence-a-share special dividend, putting the entire 70% share trade off at 1.4 billion pounds (Kennedy, 2010). By calculation therefore, the total number of share traded can be worked out This will be given as 1,400,000,000 0.92 = 1,521,739,130 individual share Again, the value of remaining 30% share with International Power can be calculated with the assumption that the price for each share is 0.92 pence. The remaining value would then be calculated as If 70% is to 1,400,000,000 Then 30% = 30 x 1,400,000,000 70 = 600,000,000 pounds It can therefore be concluded that the merger was a good economic move for both companies since it transformed the market base of Gaz de France and also expanded the revenue of International Power REFERENCE LIST Gardener, R. A, 2001, Financial Complexities in Global Market. London: Zion Press Limited GDF Suez, 2012, Preferred bidder for Az Zour project in Kuwait, Press Release, [Online] http://www.gdfsuez.com/en/news/press-releases/press-releases/?communique_id=1587 [Accessed March 13, 2012] International Power, 2011, 2011 Full Year Highlights, International Power plc, [Online] http://www.iprplc-gdfsuez.com/investors.aspx [Accessed March 17, 2012] Investopedia, 2012, Reverse Takeover, [Online] http://www.investopedia.com/terms/r/reversetakeover.asp#axzz1pKtPuBgw [Accessed March 1, 2012] Kennedy S, 2010, GDF Suez to take majority control of International Power, Market Watch [Online] http://articles.marketwatch.com/2010-08-10/industries/30722766_1_special-dividend-london-stock-exchange-infrastructure [Accessed March 15, 2012] Koduah A. W. R, 2001, Global Financial Act. Accra: Ultimate Printing Press Oxford University Press, 2007, PESTAL Analysis. [Online] http://www.oup.com/uk/orc/bin/9780199296378/01student/additional/page_12.htm [Accessed March 15, 2012] Ruddick G, 2012, International Power sweetens GDF Suez merger with £1.4bn cash for investors, The Telegraph [Online] http://www.telegraph.co.uk/finance/newsbysector/energy/7936043/International-Power-sweetens-GDF-Suez-merger-with-1.4bn-cash-for-investors.html [Accessed March 16, 2012] The Guardian, 2012, International Power, Guardian News [Online] http://www.guardian.co.uk/business/internationalpower [Accessed March 16, 2012] Read More