French Nuclear - Competition Between EDF And Engie For Areva

| About: Electricite de (ECIFF)

Summary

EDF has submitted a Eur 2bn (USD 2.2bn) offer for Areva's reactor business. But it is not clear which parts that includes.

Engie may make an offer for the international part only, which makes a lot of sense.

Both shares will react negatively during a convoluted negotiation.There is very little downside risk for Engie, but considerable upside. For EDF, the case is the opposite.

EDF (OTCPK:ECIFF) has made a Eur 2bn (USD 2.2bn) offer for Areva's (OTCPK:ARVCY) reactor business. Engie (DFZY) may focus on the international part of Areva's nuclear reactor business only. That would make sense, but may be politically less desirable. Conversely, the prospect of such an offer may push EDF (EDF FP) to a weaker negotiating position. Engie already shows it holds a strong position in this landscape. There is a lot of upside with very little downside for Engie in this, but a lot more risk for EDF.

EDF has made a Eur 2bn offer for Areva's reactor business. What parts the offer comprise is not clear at this stage. This an indicative offer and first step for negotiations. Now, there is due diligence and negotiations over risks and liabilities, notably the Finnish project.

Engie has been reported previously to want to bid for the international parts only. That makes sense, as the French business is by and large EDF. Engie might not want to take on the service for its biggest domestic competitor. However, there is already some cooperation between Engie and Areva on international projects.

It gives the impression of cherry picking. But, Engie can afford to be selective. It does not need a deal, and clearly, the international part is the most attractive one. It may enable Engie to materially raise its profile as a French nuclear name of reference, i.e. improving its position for high profile global contracts in the sector.

That in turn might not be desirable to the French government. The policy so far was clearly for EDF (in conjunction with Areva) to be the nuclear champion. EDF will very likely put a lot of effort into retaining that position. That again, may have had some impact on the valuation it has offered for the Areva business. It may contain strategic value, that investors, however, are highly unlikely to find agreeable.

The CEO of Engie has now mentioned the possibility to take a stake in Areva. That would be a less desirable outcome but could still give Engie the parts of the business it is looking for.

If Engie succeeded, it would be a master stroke.

There will now be a phase of convoluted negotiations that will likely cloud performance of both share prices, but EDF more so.

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