(This updates an item that ran at 0707 GMT, adding a comment from an equity strategist and background.)

By Brian Lagrotteria

OF DOW JONES NEWSWIRES

PARIS -(Dow Jones)- Suez SA (12052.FR) and Gaz de France (1020848.FR) said Monday that their boards have approved an all-share, one-for-one merger - a deal that will create one of the world's largest utilities with a combined market value of around EUR70 billion .

Suez's shareholders will receive an extraordinary dividend of EUR1 per share, worth EUR1.25 billion, prior to receiving a GdF share for each Suez share.

Technically, "the offer is launched by GdF on Suez," French Finance Minister Thierry Breton said on French radio RTL this morning.

The companies said the offer represents a 3.9% premium to Gaz de France's average of share prices over the three months to Feb. 24 .

People involved in the deal said over the weekend that the new entity will be run by Suez's Chairman Gerard Mestrallet, 56, while GdF's Chief Executive Jean- Francois Cirelli , 47, will be his number two and heir apparent.

The merger will generate EUR500 million in annual pretax savings to be achieved in three years, the two companies said. A large part of the synergies would come from optimizing energy supplies, they added.

Before Monday's market open, Suez had a EUR43.06 billion market value, while Gaz de France was worth EUR29.32 billion .

At 0948 GMT, Suez shares were down 5.1%, or EUR1.73 , to EUR32.16 . Gaz de France shares were up 1.2%, or EUR0.35 , to EUR30.15 .

"Given the terms of the offer and the synergies expected, the deal is almost value neutral for Suez shareholders and positive for Gaz de France's," Exane BNP Paribas analysts said in a note to clients.

"At first, this deal appears defensive. But the merger is also strategic: it brings together two companies with complementary skills and positions across Europe . The heart of the rationale of the deal should come from cheaper, more value-creating investments," the analysts added.

The companies said they have been discussing a deal for "months," but they accelerated their talks last week after Italy's Enel SpA (EN) said it was considering launching a bid on Suez.

The French government, which owns around 80% of GdF, responded to Enel's appeal by blessing a Suez-GdF merger on Saturday, saying it was the most appropriate way to secure energy for France .

The deal means the French government will have to change the law to be able to reduce its 80% stake in GdF to below 70%, a process that could take "weeks," Breton said Sunday.

Breton is also meeting union representatives today. Unions have said they oppose the merger, which amounts to full privatization of GdF.

The deal comes as France is propelling its idea of "economic patriotism" in the face of globalization. It also comes as a spate of hostile takeover bids across the continent threatens French control of some of the country's largest corporations.

"The question is, will there be an Enel counter bid?" asked Edmund Shing, an equities strategist with Kepler Equities in Paris . "It'll be difficult to pull off since (Suez's main shareholders) are already backing the GdF deal."

On Friday, Suez's largest shareholder, an investment firm controlled by Belgian financier Albert Frere, said he supported a deal with GdF.

Another investment fund, Knight Vinke Asset Management, said it also supported a deal with GdF if properly valued, but added that a deal shouldn't preclude Enel from bidding.

Technically, the merger announcement doesn't prevent Enel from launching a bid. But that would mean going against the French government's will to support the Suez-GdF merger. Enel Saturday reiterated, however, it is still interested in Suez's energy unit Electrabel.

In a statement, GdF and Suez said their merger would create "a European champion with a global size in energy and environment."

The combined group will generate around EUR64 billion in annual revenue from electricity, gas and water operations, based mostly in France and Belgium .

Suez and Gaz de France said they have not yet determined the governance structure of the new group.

France's Breton said in an interview published Sunday that the state would retain at least 34% of the new company, or enough to give it a blocking minority.

The companies said that the deal won't lead to any job losses, and the legal statutes of each company's employees won't change.

Suez and Gaz de France said they expect the deal to be complete by the end of the year.

Company Web site: http://www.suez.fr

-By Brian Lagrotteria, Dow Jones Newswires; +33 (0)1 40 17 17 67; brian.lagrotteria@dowjones.com

(Anne-Sylvaine Chassany contributed to this report) (END) Dow Jones Newswires 02-27-06 0507ET Copyright (c) 2006 Dow Jones & Company, Inc.