GOF SELLS ADDITIONAL 6.2% STAKE IN FRANCE TELECOM

UNCLAS SECTION 01 OF 02 PARIS 004116

SIPDIS

PASS FEDERAL RESERVE
PASS CEA
STATE FOR E, EB, EUR AND DRL/IL
TREASURY FOR DO/IM SOBEL, RHARLOW, LHULL
TREASURY ALSO FOR DO/IMB AND DO/E WDINKELACKER
LABOR FOR ILAB - WBRUMFIELD
USDOC FOR 4212/MAC/EUR/OEURA

E.O. 12958: N/A
TAGS: EFIN ECPS ECON PGOV FR
SUBJECT: GOF SELLS ADDITIONAL 6.2% STAKE IN FRANCE TELECOM
TO REDUCE PUBLIC DEBT

Ref: 04 Paris 6529

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SUMMARY
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1. On June 7, the French government reduced its stake in
the company by 6.2%, but demand was not sufficient to sell
an 8% stake to the private sector as initially planned. The
decision to sell France Telecom shares was one of the first
government decisions under new Prime Minister Dominique De
Villepin. Privatization proceeds (3.4 billion euros) will
be used to reduce public debt, which is currently over one
trillion euros. The sale appears to be a symbolic gesture
to show government commitment to public debt reduction and
continued privatization. End summary.

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Government Sells a 6.2% Stake in France Telecom
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2. Exactly two days after a nine-month period during which
the government stuck to its commitment not to sell France
Telecom's shares (reftel),Finance Minister and former
chairman of France Telecom Thierry Breton announced a
government decision to further reduce its stake in the
company. The government planned to sell a minimum 6% stake
in France Telecom or 152 million shares it held directly and
indirectly through ERAP, the public establishment that
manages France Telecom's capital ("capitaux propres").
Breton said that the government might sell up to 2% more if
there was adequate demand for the shares. On June 7, a
finance minister press communique announced that the
government sold a 6.2% stake in France Telecom.


3. Shares were sold to institutional investors through an
accelerated book building process. The sale was managed by
Goldman Sachs, the global coordinator and joint book-runner,
and BNP Paribas, Societe Generale, Deustche Bank and ABN
Amro/Rothschild. Quotation of shares was suspended during
the sale. Finance Ministry staff close to Breton said that
the objective was to release stocks from "overhang" risk.
The price of a share in France Telecom has decreased 7.4%
since January 1. France Telecom has a market value of 56.5
billion euros.


4. The government has reduced its stake in France Telecom
to 34.9% (above the minimum 33% to retain a blocking
minority) from 41.1%. Since September 2004, the Government
stake has decreased from 42.25% (reftel) to 41.1% due to the
share sales to France Telecom's employees in January 2005.
Breton confirmed that the government "plans to remain a
major shareholder over the medium-term."

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Privatization Proceeds Will Again Be Used to Reduce Public
Debt
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5. The sale netted the government 3.4 billion euros, below
the 3.5-4.0 billion euro government target, which had taken
into account pricing related to this type of sale. The sale
has driven share prices close to 22.37 euros, below the
French government's target of 22.50-22.85 euros, but well
above the 19.05 euro share price earned at the last GOF sale
of France Telecom stock (reftel). Francois Travaille at
Dexia Securities declared: "there is a lack of visibility
regarding the three-year company strategy to reduce costs
and debt; the price was expensive; the environment of the
sector is still weak; and we are seeing many profit
warnings. People think the sale was politically motivated
rather than an economic response to events demonstrating
quick government action."


6. The government will use the proceeds from the partial
privatization of France Telecom to reduce its public debt of
64.7% of GDP in 2004 or 1.067 trillion euros. This decision
falls under French government efforts to reduce the public
debt to 62% by 2008. Yet privatization proceeds cannot be
used to reduce the general government budget deficit, as EU
budget rules forbid the use of privatization proceeds for
this purpose.


7. So far during 2005, the government has sold shares in
the state-owned toll highway company SANEF (950 billion
euros) and France Telecom. Other privatization plans this
year may include electricity and gas utilities EDF and GDF,
as well as the nuclear group Areva. The initial public
offering of GDF was expected to come to market in September,
while share offerings for EDF may be postponed from
October/November until early 2006. De Villepin promised
that the partial privatization of Gaz de France (GDF) would
begin on June 23, with sales of Electricite de France (EDF)
and several highway companies to follow.

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Unions Protest
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8. The sale of France Telecom shares was announced late on
June 4 -- a week after the French rejected the European
constitution. The decision sparked an outcry from unions
about employment and the future of public services. Much of
the French public considers telephone, electricity and gas
to be "public services" whose quality, availability, and
affordability should be guaranteed to all residents by the
French state. Labor union group Force Ouvriere stated:
"after a slap in face on May 29 with the rejection of the
European Constitution, we were expecting a government policy
re-focused on public services; and we get an accelerated
privatization of France Telecom: the government has not
understood anything." However, unions had already called
for a day-long strike on June 8 before news that the
government announced it was selling a new stake in France
Telecom.

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Comment
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9. Selling shares of France Telecom was the easiest way for
Breton to reduce public debt. Planned partial
privatizations of GDF and particularly EDF are much more
controversial among powerful public sector labor unions.
Nevertheless, the overall impact on the public debt is
minuscule, as the debt remains around one trillion euros
after proceeds of the sale. Some might say that the France
Telecom sale is merely a symbolic move showing that the new
government continues its pursuit of privatization.
WOLFF