Chirac's Lightning Strike

Two moves will shake up the bloated defense industry

Arms makers around the world have long wondered when France would join the industry trend and consolidate its defense companies. On Feb. 21, President Jacques Chirac at last made his move: Turning merger broker, he strongly urged the nation's two big aircraft builders--state-owned Aerospatiale and family-controlled Dassault Aviation--to fuse within two years. At the same time, he ousted CEO Alain Gomez of state consumer-and-defense electronics giant Thomson and announced plans to sell the company by yearend.

Pressures for a shakeup have been mounting. Adjusting to the post-cold-war era, Britain, Germany, and Italy have already taken major steps to restructure their military Establishments. Beyond that, the stubborn French budget deficit--5.5% of gross domestic product in 1995--has left Gallic leaders with little choice but to tighten up. Both Thomson and Aerospatiale are financially shaky. Thomson lost $348 million in 1994 and is still bleeding red ink, analysts say. For 1995, Aerospatiale, with $7.8 billion in sales, is expected to announce its fourth consecutive annual loss. Both have been badgering the government for $2 billion in new capital.

THINNER SLICE. But Chirac has other ideas. He wants Aerospatiale to grab cash-rich Dassault, which is 45% government-owned and builds the Mirage fighter and Falcon executive jets. The aim is to create a French aviation giant. And at Thomson, the plan is for a sell-off of at least part of the government's 76% stake. The holding company is also expected to merge with its richer affiliate, Thomson-CSF, a defense electronics company.

Gomez lost his job because he objected to the merger with Thomson-CSF, analysts say. The deal would dilute the 42% of Thomson-CSF shares that are publicly traded. Not surprisingly, those shares fell 11%, to $23.80, on the day Gomez was pushed out. Now, Marcel Roulet, 63, his newly appointed successor, will have to see the Chirac strategy through. Roulet, the ex-chairman of state-owned giant France Telecom--which owns 20% of Thomson--was replaced last year after he pushed for privatizing the outfit.

With defense soaking up only 10% of French GDP, down from 12% in 1991, and with exports drying up, arms makers are likely to accept a reshuffling. A Dassault-Aerospatiale merger has been a government dream for a decade, but the Dassault family, which owns 45% of the company, has resisted. So Chirac is promising that the French air force will place a major order for Dassault's new fighter, the Rafale, if the family agrees to the merger.

For France's proud defense companies, it's all a big comedown. But these days, France's wars are being fought in the budgetary trenches. As Paris slashes defense jobs and spending further over the next few years, more sell-offs are likely to be on the way.

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