* Alstom saga shows "economic patriotism" rules
* Montebourg set the pace during two months of talks
* French state will have say in GE-Alstom alliance
(Updates with Bouygues agreement)
By Mark John and Jean-Baptiste Vey
PARIS, June 22 There was dual cause for
back-slapping in President Francois Hollande's Elysee Palace
late on Friday night.
France had thrashed Switzerland in the soccer World Cup, so
largely assuring its place in the next round. And the government
had just imposed its will to end a two-month fight for control
over ailing French engineering group Alstom.
"France has shown it can negotiate cleverly and openly with
multinationals," an official close to Hollande said of the
decision announced hours earlier defining the shape of a planned
tie-up between Alstom and U.S. conglomerate General Electric
"France's international image was at stake ... We have shown
we can stand up for our sovereign interests, as other countries
do," said the official, speaking on condition of anonymity.
It may be debatable what that image now is. But for
prospective investors in France the Alstom saga has brought home
one simple fact: in France, economic patriotism rules.
From the moment in late April that GE revealed its interest
in the 86-year-old group that built France's power grid and
high-speed TGV trains, politics has never been far away.
The battle was fought as Hollande's Socialists tried in vain
to halt the rise in last month's European Parliament elections
of the far-right National Front, whose protectionist platform
attracts voters bewildered by France's economic decline.
The pace-setter in the race for Alstom has not been GE or
its German rival Siemens but 51-year-old French
economy minister Arnaud Montebourg, a loose cannon who makes no
secret of his own presidential ambitions.
The future of Alstom is far from assured. Shareholder
Bouygues agreed on Sunday to sell the French state a 20 percent
stake in the French group as the government requested, but the
exact shape of the GE-Alstom venture must still be defined.
Yet the accounts of participants in the closed-door talks
interviewed by Reuters show how the GE-Alstom tie-up now taking
shape was partly dictated by Montebourg's push for an alliance
in which French interests will be secured.
When Montebourg learnt through media reports over two days
from April 24 to 25 that GE was planning some form of approach
to Alstom, he could not contain his rage.
Only two months earlier when he held the more junior
industry portfolio, he had dismissed as "hare-brained"
suggestions that the government was worried about Alstom's
future after its shares plummeted on a profit warning due to
weak order books.
Now, newly-promoted to the economics post in a government
reshuffle, he looked embarrassingly out of the loop.
"We won't let Alstom sell this national champion behind the
back of its shareholders, its employees and the French
government," he fumed on his official Twitter account.
He further accused Alstom's CEO Patrick Kron of "a breach of
national ethics" for not keeping him informed of GE's approach
for its turbines and grid equipment business for price which
sources put at $13 billion.
That sense of betrayal, according to several sources who
dealt directly with the minister, was at the root of his
preference for a tie-up offer from Siemens - a group whose
acquisition advances Kron balked at a decade ago.
"For Montebourg this is personal. He's out to get Kron,"
said one of those sources.
It was Montebourg who on April 27 first officially revealed
a Siemens plan he hoped would create two "European champions"
with tie-ups in energy and transport to counter the U.S. offer.
Over the next week, he acted fast. He set much of the agenda
for Hollande, whose unflattering nickname "Flanby" - a French
brand of wobbly caramel custard - he owes to a Montebourg quip
While Hollande played down the prospect of the French state
purchasing a stake and urging an "industrial solution", that was
an option Montebourg never ruled out.
And when the president accepted an invitation by German
Chancellor Angela Merkel to join her one weekend in May in her
constituency of Ruegen, a windswept island on the Baltic coast,
Montebourg had already laid the groundwork.
On the morning of May 9, Montebourg had met Siemens CEO Joe
Kaeser in Paris before dashing to Berlin to meet his German
counterpart Sigmar Gabriel, a fellow left-winger who is also
vice-chancellor in Merkel's grand coalition.
The timing was perfect. A day later on Ruegen, where
Hollande was treated to a boat tour and a stroll along the pier
under drizzly skies, Merkel confirmed her government would back
a Siemens tie-up if it made industrial sense.
At home, political pressure for the government to show it
was standing up for the interests of the 18,000 Alstom workers
in France was growing.
The National Front's Marine Le Pen had already accused the
government of having "abandoned Alstom to be dismantled for
American or German profit". Even the mainstream opposition noted
that conservative ex-president Nicolas Sarkozy had agreed a
state rescue for the group a decade earlier to ward off Siemens.
It was then that Montebourg got out his nuclear weapon.
On the evening of May 14, Reuters was tipped off that
something of interest would appear shortly after midnight in
France's Official Journal, the state gazette in which laws must
be published to take effect.
It turned out to be a decree stating that any deal in the
energy, water, transport, telecoms and health sectors would
require the approval of the economy minister - a substantial
strengthening of existing state powers on takeovers.
"With this decree, we're armed to continue discussions and
negotiations with the two companies that have expressed an
interest," a source close to Montebourg said.
The European Union's internal market authorities warned of
the risk of protectionism and said they were looking at whether
it was compatible with EU treaties.
France's main employer group Medef said it was a "bad idea"
in a country already more closed than its peers to international
merger and acquisition activity. According to Thomson Reuters
data, only 37 percent of acquisitions of French companies have
involved foreign groups since 2000, compared with 55 percent for
Britain and 59 percent Germany over the same period.
But Montebourg was unrepentant, pointing out that other
countries also had laws governing control of strategic
industries while noting: "This is the end of laissez-faire."
Alstom's fate remained uncertain. Siemens had outlined a
proposal to Alstom worth $14.5 billion, offering to exchange
part of its rail business plus cash in exchange for Alstom's
power assets, but it had yet to make a formal offer.
Behind the scenes, Montebourg had started to sound out local
industrialists about an all-French solution. "We have launched a
study of Plan C," he told Reuters on May 22.
"Plan A is GE, Plan B is Siemens, Plan C is a home-based
solution," he said of an option that would involve French
capital, whether from privately-owned or state-owned companies.
In the end, Plan C did not fly. GE, meanwhile, had finalised
its bid for Alstom at $16.9 billion, extended the offer deadline
from June 2 to June 23 and went on a local charm offensive.
Clara Gaymard, the head of GE France and the wife of a
former French finance minister, was using her well-stuffed
political contacts book to lobby for the U.S. group.
CEO Jeff Immelt had already met Hollande in April to explain
his plans and now, to the surprise of French lawmakers, said he
was ready to submit to a grilling in parliament on May 27.
"Jeff is our CEO and he is running things," said a GE
spokesman. "He is in Paris anyway, so we decided he should
attend. It's normal that he should come and defend the project."
At a late-night session, Immelt promised lawmakers to
increase jobs in France and revealed he was in "constructive"
talks with the government to secure French access to Alstom's
nuclear-related assets - a local concern.
The U.S. group launched a print ad campaign based on
hand-drawn pictures of wind turbines with the caption "Tomorrow
will be Made in France" - a play to win over public opinion
while wooing Montebourg by picking up the same slogan he used
for a "Buy French" campaign.
The end-game was nearing. On June 16, Siemens announced it
had teamed up with Japan's Mitsubishi Heavy Industries
(MHI) to make an offer for Alstom's turbines business involving
$9.5 billion in cash and joint ventures.
Under the deal, Siemens would buy Alstom's gas turbines
business, MHI would buy stakes in Alstom power assets including
grid and hydroelectric power equipment, and a venture would be
formed to create a joint "European rail champion".
But the government urged both bidders to do better. "The
talks between the state and the different companies are going to
continue this week," a source in Hollande's office said last
Tuesday. "The offers must be improved."
It set the stage for the frenzied last few days of the
contest. GE turned its bid on Thursday from a pure purchase into
an alliance involving joint ventures, a few hours before
Siemens-Mitsubishi upped their cash component to $11 billion.
Speculation grew of a split between Hollande, said to back
GE, and Montebourg, still seen to favour Siemens. A Thursday
meeting of the two and other ministers produced no consensus.
One trade unionist said the minister had confided earlier in
the week that he suspected Hollande backed the GE bid partly
because he wanted to persuade U.S. authorities to ease penalties
on French bank BNP Paribas for breaching U.S. trade sanctions
between 2002-2009 - a link no French official has made publicly.
"Montebourg told us on Tuesday, 'I have no idea what is
going on inside the president's head, or what he will decide.
But I do know there is huge American pressure to choose GE'," a
delegate for the CGT trade union said.
Montebourg was denying local media reports of his
resignation only a few hours before he announced on Friday
afternoon that the government had chosen GE - with caveats.
If the deal goes ahead, the U.S. firm will walk away with
Alstom's gas turbines arm and its lucrative servicing contracts,
but must negotiate joint ventures with Alstom in other fields.
Aside from the 20 percent stake the French state will take
in Alstom, it will hold a "golden share" giving it veto rights
over strategy of the nuclear joint venture. GE must create at
least 1,000 new French jobs or face fines.
"This has shown that companies don't have a free hand and
the wider interest can still prevail," said Dominique Gillier,
general secretary of union CFDT's metallurgy arm. "Montebourg
managed to up the stakes and improve the bids. He can walk out
of this with his head high."
But another source close to the talks expressed distaste at
the way the government handled the affair. "Alstom is a
privately-held company. But the government is acting as if it
were state-owned," said the source. "It's unbelievable. What
message does this send the world?"
Still others point out that this should come as little
surprise given the interventionist record of French leaders
regardless of their political colour.
Montebourg failed last year to keep open blast furnaces in
eastern France which steel group ArcelorMittal wanted to shut
down, threatening at one point to nationalise them.
A conservative government's decision in 2005 to name French
dairy group Danone a company of strategic importance - shielding
it from a feared takeover by U.S. drink-maker PepsiCo - is now
regarded as a classic example of "economic patriotism".
Russell Solomon, senior vice president and lead GE analyst
at Moody's credit ratings agency, said the saga was "indicative
of the protectionist type of environment you have to deal with
when doing business in France".
"With that said, GE has been ... very familiar with the
business practices and the regulatory environment in Europe
generally and France in particular. The implication is that they
know what needs to be done."
(Additional reporting by Natalie Huet, Benjamin Mallet and
Elizabeth Pineau in Paris; Jeffrey Dastin in New York; Writing
by Mark John; Editing by David Stamp and Eric Walsh)