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France Wants Out Of Business


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FRANCE WANTS OUT OF BUSINESS

`I'm not a rigid man, not at all," French Prime Minister Edouard Balladur stressed during a recent interview on national TV. Not that his fellow citoyens need convincing these days. If anything, voters who swept the courtly Balladur's conservative coalition into power two months ago are concluding that he may be desperate enough to try anything to turn around France's deepening economic crisis.

After pushing through an austerity budget that raised consumer taxes and aimed to consolidate his credibility as a hard-money zealot, Balladur on May 25 did an about-face. He unveiled plans to float a $7 billion bond issue intended to stimulate the economy with public works and rein in galloping unemployment, now at 10.7%. A day later, he filled out his blueprint with a plan to privatize 21 state-owned companies, including such family jewels as Air France, Renault, Banque Nationale de Paris, Thomson, and money-losing computer maker Groupe Bull.

The conservatives say they are only continuing down the list of privatizations they began when last in power, from 1986 to 1988. Yet Balladur appears headed for a bold break with the postwar chapter of state capitalism, or dirigisme, that dates back to the Gaullist era. For one thing, the 20% cap on foreign investment imposed on the 1986 sell-offs has been lifted. That means such proud national symbols as Air France and Renault could conceivably fall under the sway of foreign companies. Clearly, the French state--often referred to as the Shareholder--wants out of the business of business. Says Economics Minister Edmond Alphandery: "Almost everywhere in the world, vast privatizations have been undertaken. France has stayed on the sidelines for too long."

BIG NAMES. Along with such high-minded principles, the government is being driven by a desperate need for cash. Balladur needs to bring down the budget deficit, which is approaching 6% of gross domestic product.

Yet making major cuts in costly social security programs would be political suicide. So privatization seems to be Balladur's only alternative. His plan is to raise cash quickly for a jobs program through the $7 billion bond issue, then pay down the new debt in the next year with $7 billion in proceeds from privatization. In all, the French government could raise up to $90 billion from selling assets, estimates Piers Butler, an analyst in broker Baring Securities' Paris office.

Balladur is planning to put some of the biggest corporate names in France on the block. He'll likely start this fall with companies such as Elf Aquitaine, BNP, and perhaps insurer AGF (table). Since Balladur's last stint as Finance Minister in 1986, France's big oil, drug, and insurance companies have streamlined operations. AGF and BNP, for instance, are managed pretty much the way their private-sector rivals are.

Yet for some companies, such as electronics maker Thomson and national carrier Air France, privatization could be a moment of painful truth. Air France lost $607 million last year and recently turned to the state for an infusion of $272 million. A private Air France would certainly have to cut its bloated work force by as much as 30%. And a privatized Thomson would find its lackluster TV operations in Europe and the U.S. under intense scrutiny from new shareholders. In contrast, privatization could be liberating for Renault, France's flagship auto maker. Under Chairman Louis Schweitzer, the company has radically restructured itself, produced spiffy new models, and readied itself for tough new competition from the Japanese. It's now solidly profitable.

DULLED APPETITES. Whether investors will be wowed is debatable. They may feel a little leery of what they are being offered. Take the effort to privatize BNP, France's second-largest commercial bank. It will benefit from the experience of Michel Pebereau, who charted the privatization of Credit Commercial de France during the last conservative reign. Yet even Pebereau, who is taking over as chairman, will struggle with valuing BNP's $140 billion in loans outstanding, half of them outside France.

You might think the nationalist French would flock to buy shares in their home companies, but recession and higher taxes could dull their appetites. A newspaper poll just published indicates that only 14% of the French intend to buy shares in the privatized companies. That's only a bit higher than the 11% who participated in the 1986-88 sell-off and not very encouraging for a privatization effort of this size. The news of big layoffs spurred by privatization could further dampen public enthusiasm.

Balladur is aware of all this, and the pressure to modify his radical program could be intense. But with the rest of the Continent adrift, he has a chance to position French industry for a strong rebound when Europe's long-awaited recovery finally arrives.WHAT THE AUCTION

COULD PULL IN

Company Industry Potential

proceeds*

Billions

RENAULT Motor vehicles $3.37

ELF AQUITAINE Oil 2.90

AGF Insurance 2.26

BNP Banking 1.21

RHONE-POULENC Chemicals 0.61

THOMSON Electronics 0.44

*Assumes state share cut to 34%

DATA: LEHMAN BROS. INTERNATIONAL, BUSINESS WEEK ESTIMATES

Bill Javetski in Paris


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