France: Investors May Be Sated

It was another successful privatization, but one that sent some alarming signals. When the books closed on May 5 on the stock sale of Union des Assurances de Paris, France's largest insurance company, the government could claim the deal was oversubscribed. But demand was far weaker than in earlier sell-offs, such as the January sale of French oil giant Elf Aquitaine Inc., when investors sought 12 times the available shares. And although the UAP sell-off earned $3.4 billion for the government, the take was $1 billion less than originally expected.

The UAP experience poses worrisome questions about the strength of investors' appetite for more privatizations, in France and Europe in general. After eight big European sell-offs in two months, "there's definitely indigestion out there," says Vicky Sleddon, manager of Kleinwort Benson Ltd.'s European privatization fund. And the banquet is far from finished. Europe's governments are still in the early stages of a massive sale of corporate crown jewels. On May 3, Germany cleared the way for a sale of Lufthansa.

If more sell-offs receive the lukewarm reception given to UAP, governments may have to cut prices or table deals, losing badly needed revenues. The nervous state of the world's equity markets will complicate things even more.

The stock performance of newly privatized French companies hasn't helped the privatization push. Of France's three big sell-offs since last fall, Banque National de Paris slipped back to its offering price in March, while Elf and Rhone-Poulenc dipped below their sales prices. All have recovered slightly, but there has been no quick killing for investors. The stocks "have performed abysmally," complains Albert Morillo, chief European investment officer for Scottish Widows Investment Management Ltd., a large institutional investor. The cool reception to UAP was especially surprising, given critics' charges that the offering price was low.

Investors blame the disappointing French showing on several factors. The recent weakness of bank and insurance stocks around Europe, because of worries about interest rates and bad real estate, have hurt. So has France's tight monetary policy, which is prolonging the national recession and dampening corporate profits. Another factor is the government's habit of selling major stakes in privatized companies to "hard cores" of friendly buyers--usually other big French institutions--which would probably block unfriendly takeovers.

French officials had considered postponing the UAP sale, but budgets argued otherwise. The French need cash to prop up ailing state companies such as Air France and Groupe Bull, and for subsidies to appease students, fishermen, and other truculent interest groups. France's conservative rulers also realize that elections next spring could cut short their sell-off, as happened when the Socialists killed their 1986-87 privatization drive. The government still has nearly 20 properties to auction off.

Delicate moment. So the conservatives may speed up their schedule--even though the outlook for equities remains weak and competing deals from outside France are coming. Another insurer, Assurances Generales de France, will be offered next fall, instead of Renault as originally intended. Labor opposition to selling the auto maker has prompted Prime Minister Edouard Balladur to postpone the Renault deal until after next year's elections. That probably means more headaches for the French: Fund managers think Renault, Europe's most profitable indigenous auto maker, would be a much easier sell than another financial stock such as AGF.

All told, it's a delicate psychological moment for privatizations. For now, the French government hopes investors will take the long view and recall that the 1986-87 sell-off of Saint-Gobain, Alcatel Alsthom, and other companies eventually produced gains of more than 100%. But if investors start souring on deals, even such fond memories won't help.

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