Government risk

Pruning France's $106 Billion Portfolio

Shrinking France's pile of state assets is easier said than done.
At Closing, May 25th
85.63 EUR

One of Europe's biggest stock portfolios is overseen by someone who once declared finance his "enemy."

The French government has about 100 billion euros ($106 billion) of holdings in more than 1,800 public and private companies from EDF to Air France. The stakes have been amassed over almost a century of successive nationalizations in the name of protectionism, strategic interest or taxpayer profit.

Elections will put a new boss at the head of these investments: reformist candidates Emmanuel Macron and Francois Fillon want to overhaul and prune the portfolio to spend cash elsewhere; iconoclasts Marine Le Pen and Jean-Luc Melenchon might end up enlarging it through populist takeovers.

Sovereign Stock Market

France held some €77 billion of listed company shares at end-2016

Source: Cour des Comptes, value of top 20 listed stakes at end-2016

Cutting these holdings would be a worthy goal, given France's track record as an investor. The portfolio has been a source of strategic confusion for companies and weak profitability.

A report earlier this year by the national audit body found that the return on equity of the bulk of the state's holdings averaged just 2.8 percent between 2010 and 2015, compared with 10 percent for the SBF 120 index.

The report blamed that under-performance on an overexposure to utilities and energy, a tendency to prop up struggling entities, and political pressure to protect jobs or overspend.

Profit Laggards

The APE state stake portfolio's average return on equity has lagged the market's

Source: Cour des Comptes, average ROE 2010-2015

This isn't just about who owns the railways. France's state portfolio managers lack a simple and clear strategy, which in turn has an impact on both stock markets as they buy and sell shares, and corporate governance as they agitate for change.

A new president could lead to new CEOs at more than a dozen public companies, according to Bloomberg News's Fabio Benedetti-Valentini. Orange SA and chipmaker STMicroelectronics NV would be particularly vulnerable.

To see how fuzzy the logic of government intervention can be, look at the car industry. The French state owns almost 20 percent of Renault and 13 percent of rival Peugeot. The Peugeot stake is a holdover from a 2014 rescue to protect jobs -- an investment that will probably end up re-sold at a profit. Macron, then economy minister, lifted the Renault stake in April 2015 to ensure the government's double voting rights would be upheld.

While France pledged to eventually cut its Renault stake, it has yet to do so, probably because the stock has since flagged. Renault CEO Carlos Ghosn described the saga a "soap opera" that has prevented a broader overhaul of the French firm's lopsided alliance with Japan's Nissan Motor Co.

French Correction

Renault's share price is still below April 2015 levels, when the state bought 5%

Source: Bloomberg

But selling down a big pile of state assets is much easier said than done. Politicians have long sought to focus voters' minds on the positive aspects of these holdings: dividends, money from asset sales and a tool to enact industrial policy.

France's state-owned companies firms employ a lot of people and there would likely be losses if undervalued utilities were sold back to the market. According to analysts at Exane BNP Paribas, only seven out of 21 stakes they reviewed were highly likely candidates to be sold. 1

President And CEO

French state-owned companies employ more people than the U.S., UK and others

Source: Cour des Comptes

Even if downsizing France's portfolio is tricky, shaking up its management would be a big improvement.

Guillaume Sarlat, a banker and author of a book on French liberalism, says France would do well to follow the example of hedge funds. That means defining a clear investment strategy, protecting against market risk, and becoming more activist to avoid embarrassments like money-losing nuclear giant Areva SA.

It's hard to disagree with him -- even if few politicians would ever want to admit the market might be right.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
  1. Air France, Eiffage, ADP, Orange, Peugeot, STMicro, and Technip.

To contact the author of this story:
Lionel Laurent in London at

To contact the editor responsible for this story:
Edward Evans at

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