France Inc. Turns to Deals as Hollande Economy Stalls
France’s Socialist President Francois Hollande may not have planned on a wave of mergers and acquisitions by his country’s biggest companies to be a defining feature of his term. That’s what he’s getting.
France Inc. is on a deal-making tear, with cement manufacturers Lafarge SA (LG) and Holcim Ltd. agreeing to create a global cement giant with more than $40 billion in revenue, Vivendi SA (VIV) deciding to sell its SFR phone unit for more than $23 billion and computer services companies Sopra Group SA and Groupe Steria SCA planning a merger. Meanwhile, Peugeot SA (UG) $4.1 billion capital-raising effort is bringing in China’s Dongfeng Motor Corp. as a partner and a shareholder.
The transactions show how France’s biggest corporations are making strategic decisions without waiting for an economic rebound at home. Lafarge and other companies are seeking growth elsewhere as Hollande struggles to deliver on a pledge to cut payroll taxes by 30 billion euros ($41 billion) and ease regulations.
“One reason French companies are more actively engaged in M&A is the way companies are managed -- more than anywhere else -- is geared toward being abroad,” said Philippe Delmas, a former Airbus SAS executive who heads consulting firm PhD Associates. “This is also fueled by the conditions and climate of the country, which are very complicated.”
The French economy, Europe’s second-largest, has barely grown over the last two years, while trading partners including the U.S. and U.K. are seeing output increase. French jobless claims are at a record high of 3.35 million, holding down consumer spending and wage growth.
Even before the Lafarge-Holcim transaction, France was by far Europe’s most active country for takeovers this year with more than $60 billion in deals, according to data compiled by Bloomberg. That’s more than double the volume in either the U.K. or Germany.
With a relatively small, highly regulated home market, French companies have long thought globally. Firms including manufacturer Alstom SA, drugmaker Sanofi, and luxury conglomerate LVMH Moet Hennessy Louis Vuitton SA (MC) get the bulk of their sales internationally.
One common thread of the biggest French deals is the need to navigate industries with major structural challenges. The merger of Lafarge with Holcim, which will create the world’s largest cement manufacturer, may help reduce overcapacity in a sector that has struggled since the recent financial crisis depressed building activity.
“An operation like Lafarge-Holcim is done because it makes business sense and shows how French companies are thinking globally,” Delmas said.
The combined company will be officially based in Switzerland, with market listings in Zurich and Paris, Lafarge and Holcim said in a statement today, and have operations in 90 countries.
Meanwhile, Vivendi is seeking to exit the French telecoms sector after fierce competition drove down prices for mobile services, forcing job cuts at SFR and market leader Orange SA. (ORA) Operators’ struggles with sluggish consumer spending, high costs for network construction, and tight regulation were compounded in 2012 when discounter Iliad SA (ILD) entered the market.
Instead of telecommunications, which were championed by ousted Chief Executive Officer Jean-Bernard Levy, Vivendi has said it’s planning to focus on media and content businesses, including Universal Music Group, the Los Angeles-based subsidiary that’s the world’s biggest record label.
On April 5, Vivendi agreed to sell its unit SFR, France’s second-largest phone company, to Altice SA in a deal valued at more than 17 billion euros, rejecting a sweetened government-backed offer from Bouygues SA.
As for Peugeot, the French carmaker most dependent on the European market was hit hard by the region’s economic crisis and resulting auto-market glut.
It brought in Dongfeng and the French government to underwrite a 3 billion-euro capital increase after European automotive sales declined for six straight years.
Peugeot is now looking to growth in China to spur sales, while Dongfeng is seeking access to technology and overseas markets.
In all these deals, the most-difficult task French companies face is to convince an increasingly unpopular government that their industries’ challenges may make job cuts necessary.
Hollande’s Socialist Party suffered an unprecedented defeat in March municipal elections, prompting the revamping of his cabinet.
Industry Minister Arnaud Montebourg, who was re-appointed, had openly endorsed a bid for SFR by construction-and-media conglomerate Bouygues, warning that the offer from cable group Altice would result in unacceptable job losses.
Along with antitrust concerns, layoffs will also be a key point of discussion with politicians in the merger of Lafarge and Holcim, which employ about 7,000 staff in France altogether.
Hollande’s government has spoken out against the closing of factories by companies like Peugeot and Alcatel-Lucent SA.
“There is still massive oversupply in the industry,” Ian Osburn, an analyst at Cantor Fitzgerald Europe, said of the cement sector. “Demand hasn’t really recovered from the trough.”
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