France Inc. has lost 124.3 billion euros ($163 billion) under President Nicolas Sarkozy.
Companies in which the state holds stakes, from Electricite de France SA (EDF) and Air France-KLM Group (AF) to France Telecom SA (FTE) underperformed international peers on Sarkozy’s watch as his government blocked their job cuts to curb unemployment, opposed tariff increases and taxed them to plug deficits.
The value of state holdings in publicly traded companies has slumped 66 percent since Sarkozy was sworn in on May 16, 2007, more than the benchmark CAC 40 Index (CAC)’s 48 percent drop in the period, according to data compiled by Bloomberg. With French joblessness at a 12-year high and household purchasing power a key election subject, investors see more pain regardless of who is elected president after next month’s ballot.
“The state will favor social peace over minority shareholders,” said Alexandre Hezez, chief investment officer at Paris-based Convictions Asset Management, which oversees 681 million euros. “This isn’t where you want to invest. I don’t think the state is looking for value creation at these companies.”
The combined value of the government’s stakes in companies from power producer EDF, GDF Suez SA, Airbus-parent European Aeronautic, Defence & Space Co., as well as in Aeroports de Paris, Areva SA (AREVA), France Telecom, Air France-KLM, Renault SA (RNO), Safran SA (SAF), Thales SA and CNP Assurances (CNP) hit an all-time low yesterday of 63.7 billion euros from a peak of 224 billion euros in November 2007, Bloomberg data shows.
Not a Plus
Neither Sarkozy nor Socialist candidate Francois Hollande has signaled they will lower the state’s stakes in companies. While they are neck and neck in opinion polls for the first round of the election on April 22,Hollande has been consistently ahead in the polls for the decisive May 6 round.
“As an investor, I wouldn’t put money in a company where the state is because I don’t call the shots,” said Roland Fernet, head of KBL Richelieu Gestion in Paris. “Tariffs can be set by the state, markets are regulated, so we have fewer cards to play. French state-controlled stakes aren’t a plus.”
EDF and GDF Suez (GSZ)’s ability to raise prices, which are politically unpopular, has been constrained by their largest shareholder. The state holds 84.4 percent of EDF and 36 percent of GDF Suez.
Sarkozy also limited or prevented gas price increases by GDF Suez on several occasions, forcing it to absorb some of the higher cost of the fuel. GDF Suez said gas tariff shortfalls have shaved about 2 billion euros from earnings since mid-2007.
It’s unlikely that EDF or GDF would be allowed “a sharp increase” in power and gas tariffs after the elections, Damien de Saint-Germain, an analyst at Credit Agricole (ACA), said in an April 17 research note. “While GDF Suez would be exposed to another margin squeeze, EDF would have difficulties in passing its increase in capex to customers’ bills.”
In 2009, Sarkozy named Henri Proglio EDF’s chief executive officer, replacing Pierre Gadonneix, who had unsuccessfully sought a three-year 20 percent increase in tariffs. Proglio was among a handful of people to celebrate Sarkozy’s election win in May 2007 at a restaurant on the Champs Elysees avenue.
Proglio battled with Anne Lauvergeon, the CEO of Areva, the world’s biggest builder of nuclear reactors, over the country’s atomic energy leadership. The spat delayed a 3 billion-euro capital increase Lauvergeon had asked for since 2004 for expansion. Areva ended up raising just 900 million euros in December 2010.
Sarkozy declined in 2011 to renew the CEO mandate held by Lauvergeon, a one-time adviser of late Socialist President Francois Mitterrand. The new CEO Luc Oursel was ordered not cut jobs in France as part of his turnaround plan.
Meanwhile, election frontrunner Hollande wants to reduce France’s dependence on nuclear energy, which may hit revenue at both reactor builder Areva and EDF, which owns all 58 of the country’s atomic generators.
France Telecom, in which the state holds 27 percent, also got a new CEO, Stephane Richard, in February 2010 when a reorganization plan put in place by his predecessor Didier Lombard amid intensifying competition in the phone market provoked a wave of suicides at the company.
Richard, who had joined the company from the finance ministry, had to put an end to the reorganization.
Sarkozy’s government also slapped phone operators with a tax to fund a partial end of commercials on public television, and awarded a mobile-phone license to a new entrant that triggered a price war at the start of 2012.
To be sure, it’s not clear that the underperformance of these companies has to do with state meddling, said Ralph Bruneau, head of stocks at Ofi Asset Management (OFICEHY) in Paris, which oversees 47 billion euros. Rather, it may reflect their domestic dependence, he said, pointing to EADS.
French plane-engine maker Safran’s shares have climbed 38 percent. The reorganization of French defense electronics company Thales SA (HO) helped contain the drop in its shares to 39 percent, less than the 83 percent slide in the shares of rival Finmeccanica SpA (FNC), 32-percent owned by the Italian state.
Still, France’s interventionist state programs create instability in the market, Bruneau said.
“There’s probably a French discount tied to the uncertainty of our economic policy,” he said.
When Renault SA, in which the state holds a 15 percent stake, and PSA Peugeot Citroen (UG), in which France has no stake, have sought to expand in low-cost countries for production, they’ve been told to produce in France and limit job cuts.
Sarkozy met with Peugeot Chief Executive Officer Philippe Varin at the Elysee Palace on Nov. 17, asking him to reconsider plans to cut more than 6,000 jobs. Renault in 2010 backtracked on a proposal to build the next Clio subcompact exclusively in Turkey after Sarkozy publicly opposed the plan.
The president has justified his actions by pointing to the 6 billion euros the government loaned the two companies during the 2009 financial crisis.
Investors say that raises questions about who’s in the driver’s seat. Renault’s shares have dropped 66 percent during his tenure, while Germany’s Volkswagen AG (VOW) has gained 7 percent. Peugeot’s 82 percent drop forced it to sell new shares this year, giving a 7 percent control to General Motors Co. (GM)
France’s flagship airline Air France, 16 percent owned by the state, has been similarly constrained. While Deutsche Lufthansa AG (LHA) has been firing people at Austrian Airlines, and British Airways (IAG) plans to eliminate 1,200 positions when it takes over Lufthansa’s unprofitable BMI brand, Air France -- bailed out by the state in the 1990s -- has had to avoid job cuts when it presented 1 billion euros in cost reductions in January.
Shares of the unprofitable French airline, which has a market value of 1 billion euros and 6.5 billion euros of net debt, have slumped even more during Sarkozy’s mandate, shedding 90 percent.
“When gas prices or public service fares are blocked, or one is prevented from having a strategy, it’s doesn’t really help earnings,” said Fernet at KBL Richelieu.
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