LONDON/FRANKFURT France's GDF Suez GSZ.PA will take control of Britain's International Power IPR.L, creating the world's largest utility with annual revenue of 84 billion euros (70 billion pounds).
The deal comes after resuming talks aborted earlier this year and will allow GDF access to growth in emerging markets and give it a foothold in the UK and Australia.
Britain's International Power can expect to cut financing costs as a result, anticipating its credit rating to be lifted to investment grade, from BB now, it said on Tuesday.
"This is one of the few utility combinations that have always made sense, regardless of the economic environment," said a London-based analyst, who declined to be identified.
The deal is another example of a foreign player entering the British power market -- where just two of the 'Big Six' household energy suppliers are controlled by domestic firms -- and follows the 2008 sale of British Energy to EDF (EDF.PA).
GDF Suez will transfer a number of assets into International Power, in return for 70 percent of the ownership in the new enlarged group. Existing International Power shareholders will hold the remaining 30 percent.
International Power shareholders will also receive a special dividend of 92 pence per share, totalling 1.4 billion pounds -- at the top end of analyst expectations -- in exchange for relinquishing control of the company.
GDF declined to comment on the value of the deal, which analysts found hard to assess because the value of the assets that GDF is transferring is not public.
International Power will stay listed and based in London and will have a market value of 18.6 billion pounds after the deal, based on its current share price.
Evolution analyst Lakis Athanasiou estimated GDF was paying 425 pence per share -- or 4.82 billion pounds -- for its 70-percent stake, based on GDF's share of the assets being transferred, expected synergies and the dividend.
The combined company will have generating capacity of over 66 gigawatts (GW) and revenue of 84 billion euros.
The GDF assets will be transferred into the British firm with net debt of 4.4 billion euros, the companies said.
GDF Chief Executive Gerard Mestrallet, who had been keen to avoid paying cash for the deal, said GDF would look to dispose of between 4 and 5 billion euros of assets to offset the negative effects of the deal on the group's balance sheet.
International Power's top management, including CEO Philip Cox, a keen soccer fan, and Financial Director Mark Williamson, would retain their positions within the new company.
INTERNATIONAL POWER SPREAD TIGHTENS
The two companies had worked through the night to get the deal announced on the day they both reported forecast-beating first-half results.
GDF shares were 1.36 percent lower at 26.42 euros at 1355 GMT, while International Power shares lost 2 percent at 372.4 pence. The STOXX Europe 600 utilities index .SX6P was 0.7 percent weaker.
"Only GDF Suez' good results and the fact that the deal makes so much sense is disguising the fact that the transaction is lowering the value of the GDF Suez share somewhat," said one London-based analyst, who declined to be named.
The five year credit default swap on International Power tightened by 18 basis points, to 155 bps as investors anticipated its improved rating outlook. GDF widened just 5 bps to 91 bps on the news.
The deal comes as energy providers recover from the slump in demand caused by the global recession.
"In term of reduction of revenues, we have clearly bottomed out. We see some positive signs of market recovery, even if they still need to be confirmed," Jean-Francois Cirelli, vice-chairman and president of GDF Suez, said.
Leading International Power shareholder Neil Woodford, who holds an 11.2 percent stake through his Invesco Perpetual funds, said he backed the deal.
The companies said they had identified synergies of 165 million pounds per year, expected to be achieved by the sixth year following completion.
The deal is expected to complete at the end of 2010 or early 2011, subject to regulatory approval and consultation with employees, the companies said.
International Power is being advised by JP Morgan Cazenove, Morgan Stanley and Nomura, while GDF's advisers are Rothschild, Goldman Sachs, BNP Paribas, Ondra Partners and Blackstone.
(Writing by Douwe Miedema, additional reporting by Victoria Howley in London and Michel Rose in Paris; Editing by Louise Heavens and Jon Loades-Carter)