FRANCE AND FOREIGN INVESTMENT: JOB PROTECTIONISM

UNCLAS SECTION 01 OF 02 PARIS 001823 SIPDIS SENSITIVE PASS FEDERAL RESERVE PASS CEA STATE FOR EB and EUR/WE TREASURY FOR DO/IM TREASURY ALSO FOR DO/IMB AND DO/E WDINKELACKER USDOC FOR 4212/MAC/EUR/OEURA SIPDIS E.O. 12958: N/A TAGS: EFIN ECON ELAB PGOV FR SUBJECT: FRANCE AND FOREIGN INVESTMENT: JOB PROTECTIONISM TRUMPS OPEN CAPITAL MARKETS SENSITIVE BUT UNCLASSIFIED, NOT FOR INTERNET Refs: (A) 05 PARIS 5935 (B) PARIS 357 ¶1. (SBU) SUMMARY. Press reports claim that France has identified at least 20 firms, including ten blue chips, that merit GOF protection from foreign takeovers. Foreign takeovers have developed a strong political and social dimension, given the government goal of reducing unemployment before 2007 presidential elections. Authorities pledge that France remains open to foreign investors, but employment concerns for the moment are trumping any commitment to open capital markets. END SUMMARY Government Reportedly Protects 20 Firms from Takeovers -------------- -------------- ¶2. (U) According to the French economic newspaper La Tribune, in November 2005 the French intelligence services identified at least 20 French companies that are potential targets of foreign takeover bids and that merit government protection from such takeover. The list includes steelmaker Arcelor, currently the object of a hostile bid from Mittal Steel; the Franco-Belgian water and power group Suez, which has been targeted by Italy's Enel; and other "national champion" companies, notably bank Societe Generale, retailers Carrefour and Casino, construction-materials firm Saint-Gobain, consumer-electronics maker Thomson, media group Vivendi Universal, and yogurt maker Danone, which was at the center of the debate last summer about "economic patriotism" (ref A). According to La Tribune, 10 of the companies are publicly traded and are part of the CAC 40. Another 10 companies are not listed in the CAC 40, but should be protected. Unlike the criteria developed for protecting strategic sectors (ref B),the GOF based its analyses on capitalization of companies, economic potentials, shareholding, growth in involved sectors, and human resources (e.g., how many French jobs are at stake). ¶3. (U) La Tribune also highlighted that French intelligence services have been used to monitor potential bids. Reportedly, intelligence services alerted Arcelor on November 17 of Mittal Steel's bidding intentions, two months before the bid became public. ¶4. (SBU) Not surprisingly, the Embassy have been unable to get official confirmation of the list's contents or its existence. Working-level contacts at the French Finance Ministry, which supposedly drafted the list for the Prime Minister, admitted seeing the press reports but denied any knowledge of the list. However, French parliamentarian Bernard Carayon (the main proponent of economic patriotism) has declared that the list was developed over a year ago, mainly to determining which companies are undervalued and therefore likely takeover targets. Government Encourages French Ownership of French Companies -------------- -------------- ¶5. (U) In March, Finance Minister Dominique De Villepin stated "we need to consolidate the capital of companies and protect them against hostile operations." In addition to amending the decree on the protection of 11 sectors deemed sensitive (ref B),the government amended the transposition bill of the EU anti-takeover directive currently being examined by the Parliament. The amendment would allow companies to resort to a U.S. style "poison pill" takeover defense, including granting existing shareholders and employees the right to increase their leverage by buying more shares through stock purchase warrants ("bons de souscription d'actions - BSA") at a discount in case of an unwanted takeover. The defense makes a takeover more difficult to achieve. The bill is still pending in the Parliament. ¶6. (U) De Villepin also asked the state-owned financial institution Caisse de Depots et Consignations (CDC), France's biggest institutional investor, to work as a domestic buffer against foreign takeovers by increasing its stakes in French companies. CDC already has significantly PARIS 00001823 002 OF 002 increased its stake in the Euronext stock exchange, a holding company formed in 2000 by the merger of the exchanges of Amsterdam, Brussels and Paris. The plan is to counterbalance "anglo-saxon" shareholders, who together hold a majority stake in Euronext, by forming a shareholders pact with Euronext's historical actors to hold a 10% stake in Euronext. Three U.S. funds, TCI, Articus and Harris, own more than 25% of Euronext. Investment Authority Reiterates France is Not Protectionist -------------- -------------- ¶7. (U) Clara Gaymard, the head of the French Agency for International Investment ("Agence Francaise pour les Investissements Internationaux" - AFII) dismissed suggestions that the government is engaging in potentially "dangerous economic nationalism". She said "when I hear people say we are protectionist, I say no." Instead she suggested the French lack enough pride in their economy. In a comment about the planned merger of Suez and Gaz de France, she stressed that a GDF-Suez deal had been on the table for two years, but the government's 80% stake in GDF prevented the deal from moving forward. She added that the government's willingness to decrease its stake to about 30% in GDF sent a clear signal that France was eager to attract investors to its energy sector, and claimed that foreign investors she has spoken to deemed the merger as "a very good industrial project." She also praised government steps to loosen French labor laws, saying "even in France we are able to change rules," indicating that the controversial new legislation permitting special youth employment contracts ("Contrat premier emploi" - CPE),which extends to two years the probationary period during which employers can more easily terminate employees, is "the beginning of a process." French Individual Investors Angry about Government -------------- -------------- ¶8. (U) According to a March 7 survey of 1,346 individual French investors, 9 out of 10 respondents opposed Mittal's unsolicited bid for Arcelor. Nevertheless, the survey revealed that 60% disapproved of government action in hostile takeover bids, and 57% said they disagreed with anti- takeover rules. Conversely, respondents to the survey also criticized the government for not supporting individual shareholders' interests by intervening in business matters. Colette Neuville, head of the individual shareholders investors association ("Association des Actionnaires Minoritaires", ADAM),stressed that "small shareholders were very angry at government attempts to block Enel's bid for Suez, since shares in Suez could have been subject to a best- price offer. Shareholders felt they were forced to accept a discount." Liberalization of EU Markets Could Reinforce French Protectionism -------------- -------------- ¶9. (U) Commentators pointed out that France is not the only EU member to have a "neo-protectionist strategy". La Tribune predicted that the list of the 20 protected companies might expand with future changes in EU legislation, notably with the gradual elimination of the EU agricultural supports by 2013, which could stimulate the foreign appetite for the processed food industry. Comment -------------- ¶10. (SBU) The government appears to be trapped between its efforts to encourage capital inflows, since foreign companies play a significant economic role, and its desire to keep corporate decision centers in France. Even more crucial in the short-term is the jobs outlook, with an eye to the June 2007 presidential elections. Foreign capital and foreign takeovers are associated with restructuring and downsizing, and, in the pre-election environment, the GOF will be loath to appear to support any foreign actors who threaten French jobs. STAPELTON