Who'll Snap Up The State Jewels Of Europe?Stewart Toy
After a pause dictated by politics and weak stock markets, Western Europe's governments are trying to restart their huge sell-off of state-owned businesses. The first in a fresh surge of deals comes on June 26, when France will offer investors $2 billion worth of stock in Usinor Sacilor, Europe's biggest steelmaker. Germany, Italy, and other countries are polishing up megadeals for the fall and beyond (table). Over the next 18 months, figures Morgan Stanley & Co., Europe will try to peddle shares in state companies for a fat $30 billion.
Success is far from certain, because everything from union protests to investor wariness could undo these plans. Yet it's crucial that governments raise more money. With state finances choppy in the wake of the 1992-93 recession, asset sales offer the best hope for slashing budget deficits. Those shortfalls average 4.5% of gross domestic product in the European Union, well above the thrifty 3% required for EU monetary union by century's end. Europe's industrial clout also hangs in the balance, since privatization brings productivity and fresh cash. "We need capital to grow, and the state can't provide it," says an official of French aluminum giant Pechiney, which yearns to be sold.
Europe's privatizers also have a more subtle goal: transforming risk-averse investors into equity lovers. In Europe, gentlemen--and ladies--prefer bonds. As a result, modest Continental equity markets hobble entrepreneurial companies that can grow only by issuing stock.
"PEOPLE'S STOCK." German Chancellor Helmut Kohl wants his long-awaited sell-off of Deutsche Telekom to produce a "people's stock," he says, to help build a German equity culture. The first 20% slice of this blockbuster deal is due by next July, at a cool $11 billion. Those shares will equal 7% of the total value of the Frankfurt stock exchange's DAX Index of 30 blue chips. Smaller countries want to expand their bourses, too. In early June, the Portuguese sold off a 28% stake of Portugal Telecom to small investors as well as big institutions. Now, it plans a similar sale of state tobacco company Tabaqueira.
Lots of obstacles could block Europe's big sell-off, however. Politics, for one. Italy, for example, has a huge basket of industrial holdings to sell. But political wrangling has pushed deals off and has also cooled foreign investors' ardor. Now, Prime Minister Lamberto Dini, a free-market economist, hopes to break the impasse by selling a stake in energy-and-chemical giant ENI next fall. If that works, he'll launch further sales. But says analyst Mike Peciti of James Capel & Co.: "You need political support to privatize, and Dini doesn't have it." Media tycoon and former Prime Minister Silvio Berlusconi, the head of the center-right coalition that hopes to regain power, is personally in favor of privatization. But his allies in the far-right national Alliance remain opposed.
FAT PAY HIKES. In France, unions are fighting privatization. They fear that if companies needn't please voters, they'll be freer to cut jobs, as British Telecommunications PLC and British Airways PLC did en masse before and after being privatized. One study shows privatization will cost Europe 800,000 jobs from 1992 to 1998. To spruce up the sale, Deutsche Telekom shed 6,000 jobs in 1994 and will cut 8,000 this year. Strike threats may prevent France from privatizing France Telecom, although Paris hopes to engineer a share swap with Deutsche Telekom next year as a first step. Renault's workers may also protest the government's sell-off plan.
Privatization has become controversial even in trailblazing Britain--where the government has had to postpone several deals as a result. The day after two electric utilities were sold in April, the regulators cut rates, thereby hurting profits and outraging investors. Voters are also angry because directors of several utilities voted themselves fat pay hikes after privatization. London still hopes to privatize British Rail and two nuclear utilities next year, though--unless the Labor Party succeeds in pushing out the Conservatives.
If Europe does manage to get all its planned deals to market, some experts fear they could crowd each other out. For that reason, certain analysts advise Bonn to wait and sell its final 36% stake in Lufthansa in 1997 rather than next year as hoped. U.S. investment banks that are winning a big chunk of Europe's privatization business tend to refute such thinking. "If you have good management and a good story, there's always good demand," says Sylvain M. Hefes, head of the Paris office of Goldman, Sachs & Co.
The French think they can fill that bill with Usinor--the kickoff company for the privatization campaign of new conservative President Jacques Chirac. Usinor Chairman Francis Mer has forged a collection of near-bankrupt units into an efficient steelmaker--the world's second-largest. Last year, it turned in a profit of $200 million, after three straight years of losses.
Market reception of Usinor will be critical for Chirac. Europe's top privatizer for the past two years, France halted deals in the runup to May's presidential elections. Now, Chirac needs cash to cut deficits while he's spending heavily to create jobs. So he may try to speed up sales. Analysts aren't sure he can do that. The unions are feisty, the franc's future is cloudy, and remaining sell-off candidates are less sexy than earlier ones.
SINKING FEELING. Investors may also note that, of the six companies that France has privatized over the past 18 months, all but one--cigarette maker Seita--are trading at or below their offering prices, owing in part to a weak recovery that has kept European bourses depressed. In France as elsewhere in Europe, "privatization has been a success for governments but less so for investors," says Richard Davidson, a European equity strategist at Morgan Stanley in London.
Yet privatization's payoff is so alluring that governments will be working hard to keep finding buyers. That goes even for regimes that have been cool toward market economics: Sweden's financially strapped Social Democrats aim to sell as much as 75% of Nordbanken, the country's fourth-largest, for $2 billion. Spain's Socialist rulers, who have sold off assets in dribs and drabs, are fighting an internal battle to forge a broad privatization policy.
Cash windfalls aside, "companies become more competitive when they are independent," says an official of the Dutch government. The Netherlands hopes to complete the sale this year of its telecom system--and then privatize the railways. European policymakers certainly have ambitious plans. Now, they have to deal with European politics to achieve them.