17 May 2007 - French utility Suez is seeking to strengthen its hand ahead of the next stage of consolidation in Europe's energy market by raising its stake in Spain's Gas Natural.

According to the Financial Times, the French company will become Gas Natural's third biggest shareholder after spending €1bn ($1.36bn) to increase its holding from a previous 5.4 per cent to a proposed 11.3 per cent.

Suez said that it had already increased its holding to 9.95 per cent of Gas Natural, and had agreement to acquire a further 1.4 per cent pending authorisation from Spanish authorities to go above the 10 per cent threshold.

The move will reinforce speculation that Suez is preparing for the failure of its proposed merger with French state-controlled Gaz de France by plotting a significant Franco-Spanish energy tie-up. People close to the companies yesterday said the incoming government of president-elect Nicolas Sarkozy was unlikely to take a view on the merger before the late summer or early autumn.

Suez yesterday denied Gas Natural was an alternative to GDF, but equally refused to rule out buying more shares in future if possible. Gas Natural's share capital remains tightly held, with a free float ofonly 23 per cent.

Barcelona-based La Caixa controls 35 per cent of the gas company, and Repsol YPF, the oil group, another 30.8 per cent. Gas Natural cannot therefore be taken over without the agreement of at least one of its controlling shareholders.

Nevertheless, the Spanish gas company has become the next obvious target in the lucrative Spanish energy market, after Enel emerged the victor of a fierce bid battle for power group Endesa.

Suez believes it now has an advantage should Gas Natural come up for auction, given that it has enjoyed a long relationship with La Caixa, once a sizeable shareholder of the French group. The two companies also recently joined forces to buy control of Aguas de Barcelona, the Spanish water and waste group in which they held a joint minority stake.

Spanish analysts said Suez was unlikely to be involved in an expensive stakebuilding exercise in Gas Natural without La Caixa's backing.

La Caixa is in a strong position to play matchmaker, as it also owns a significant stake in Repsol. For weeks, analysts have been speculating whether La Caixa will bless a union between Repsol and Gas Natural, or whether it will favour an alliance between Suez, Gas Natural and Aguas de Barcelona.

Repsol's chairman, Antonio Brufau, has been pushing La Caixa to consider a Repsol-Gas Natural merger.

But Mr Brufau's position is under threat by Sacyr Vallehermoso, a Spanish builder which has built a 20 per cent stake in Repsol.