Europe's Most Frustrated Banker
Money isn't everything--just ask Crédit Agricole Chief Executive Jean Laurent. He has an ambitious goal: transforming France's biggest retail bank into a global powerhouse. He also has a big chunk of dough: $5 billion raised from the bank's listing on the Paris stock exchange in December. "Our listing has given us the means and the flexibility to do deals," says Laurent. The juicy deal on the horizon is acquiring Crédit Lyonnais, France's fifth-largest bank. Although Laurent won't confirm any designs on Crédit Lyonnais, his bank's takeover ambitions are the talk of financial Europe. There's just one problem. Laurent can't get his hands on Crédit Lyonnais--not yet, at least. And the longer he must wait, the harder it will be to realize his global dreams for Crédit Agricole.
How can a guy with $5 billion in cold, hard cash be denied his prey? Blame French politics, which has a habit of meddling in European finance. If not for the French government, Crédit Lyonnais probably would have been taken over already. A former state-owned basket case, it was restructured and privatized in 1999 and is now thriving, but it's considered too small to survive on its own as the banking industry consolidates. The government still holds a 10% stake in Lyonnais, though. And before floating the bank on the market, Paris sold 33% to a group of core shareholders, including Crédit Agricole and German financial-services giant Allianz. Eager to ward off a takeover, the government locked them into an agreement that prevents any of them from launching a bid before July, 2003.
What Laurent wants now is the government's stake, which the markets figured would be put up for sale after French parliamentary elections end on June 16. That, added to Agricole's current 10.5% holding, would put Laurent in pole position for a takeover when the share lockup expires. The patient, low-key Laurent, 57, who became CEO in 1999, has spent months quietly making his case to the government. The word is that he had persuaded Socialist Finance Minister Laurent Fabius to sell Agricole some or all of its stake and to support its takeover bid. But in April, the Socialists were unexpectedly kicked out of office. The new Finance Minister, Francis Mer--who's likely to stay on after an expected center-right victory in the parliamentary vote--has kept mum on the subject and has not met with any of the key players.
Now, Laurent could face a drawn-out battle to land Crédit Lyonnais. Bagging the bank and its $180 billion in assets could require months of negotiation with the new government and other big Lyonnais shareholders. Lyonnais' influential CEO, Jean Peyrelevade, who is fighting to keep the bank independent, is playing for time, hoping Paris will shelve the whole idea for a while. "Our pact is protected by law [until July, 2003], and a new government will have other worries," he told shareholders at Lyonnais' recent annual meeting. Finally, many of Agricole's own longtime shareholders, fearful of losing majority control of the bank, must be mollified.
Laurent may still win Lyonnais, but the delay could damage his credibility with the markets. If investors don't see results from the money raised by the public listing, they could push down Agricole's share price, which has risen 35% since the initial public offering. "Agricole must be in a difficult position. It has all that money sitting around and needs to use it," says a banker close to the action.
For now, the politics are frustrating Laurent's grand scheme to move this 108-year-old provincial player onto the world stage. Already, Agricole has roughly $500 billion in assets, making it the world's No. 15 banking company by that measure. But while Agricole is strong in retail operations, Laurent still needs to prove that it can compete in higher-margin businesses such as asset management and investment banking. He also must show that Agricole can move nimbly despite its cumbersome mutual-ownership structure, under which it is 70% controlled by regional French banks. It took Laurent and Chairman Marc Bue nearly two years just to persuade the regional bankers to approve the IPO.
Acquiring Crédit Lyonnais would be a big step in the right direction, doubling the size of Agricole's $170 billion asset-management unit and bringing in a valuable corporate-banking business. It also would improve efficiency, since back-office functions could be combined, and nearly one-fourth of Lyonnais' employees work abroad and aren't covered by rigid French labor laws. That would boost Agricole's return on equity, which at 13% lags the European industry average of 16% to 17%. Moreover, absorbing Lyonnais would reduce the regional banks' hold on Agricole and give it a sorely needed injection of shareholder culture. Only 30% of Agricole is listed, while nearly 60% of Lyonnais' shares are traded. Says Benoit Vincenzi, an analyst at London investment bank Fox-Pitt, Kelton: "The whole balance of power will change."
Maybe--but how soon? Mer, the new French finance minister, served on Crédit Lyonnais' board until this spring and might heed Peyrelevade's pleas to move slowly. On the other hand, because the government needs money to help cut its budget deficit, it could be tempted to sell its Lyonnais stake, worth $1.5 billion at the current market price. And while some foreign groups, including Allianz, are interested in bidding for Lyonnais, most observers think the government will try to keep it in French hands.
Despite the uncertainty, Lyonnais remains Agricole's best shot at a big catch. Cross-border banking acquisitions continue to be scarce in Europe. Agricole took a 10% stake in Lazard LLC last year, prompting speculation that it might try to acquire the investment bank. But with the investment-banking business in a slump and new management installed at Lazard early this year, such a move now looks unlikely.
For the time being, Agricole will probably keep growing piecemeal, perhaps adding to stakes that it has taken in European banking groups such as Italy's Gruppo Intesa or Commercial Bank of Greece. Such holdings open up markets for higher-margin services like asset management and insurance that Agricole has been promoting aggressively since its 1996 acquisition of French investment group Indosuez. Oddly enough, Agricole's own retail network, dominated by conservative rural bankers, has been slow to promote some of these snazzier services. Analysts say that underscores the urgency of reforming Agricole's balky structure. But Laurent insists that he's patient: "Sometimes it takes us a bit of time to launch a project, but when we do, we are a powerful machine."
Meanwhile, Laurent's Agricole should post nearly 10% earnings growth in 2002, to $1.5 billion. Its stock is one of the best-performing on the French market. And Laurent says the IPO has given fresh momentum to the bank's transformation. "There is more transparency [and] a great push to clarify our strategy," he says. Things would get a whole lot clearer if he could land Lyonnais.
By Carol Matlack in Paris, with David Fairlamb in Frankfurt