* France drops to 9th in European deal rankings from 2nd
* Weak economy, higher taxes deter dealmakers
* Structural change key to reviving deals
By Christian Plumb and Anjuli Davies
PARIS/LONDON, April 29 A collapse of private
equity investment this year seems increasingly emblematic of
France's deep-seated economic problems and how hard it may prove
to change a vicious cycle of poor growth and weakened companies.
Deals in a sector that is often essential to fuel the
expansion of small and medium-sized businesses have slowed to a
trickle - $437 million in the first quarter of 2013 compared
with a peak of $36 billion in 2006 - and sector players say
there is little prospect of a pickup anytime soon.
Some point to the perceived anti-business stance of leftist
President Francois Hollande and his unwillingness to shake up
labour rules, as well as tax moves that have lowered the
profitability of private equity deals.
But either way, France's problem with generating growth and
competing have played a key role in the slide, along with some
companies' reluctance to hive off the type of units that are
traditionally appetising targets.
That in turn may be because sellers are holding out in the
hope of getting more for assets later, with the debt they
incurred to buy them originally currently cheap to service. But
it is also a measure of how bearish buyers are.
"One country where there seems to be consensus is France.
Everybody is absolutely negative," Lionel Assant, the head of
European private equity at Blackstone, told delegates at
a recent industry conference in Berlin.
"Structural reforms have not started. The country is
effectively denying the inevitable."
"IN THE TOILET"
After thousands of job losses at major firms including PSA
Peugeot Citroen, Renault and ArcelorMittal
, Hollande badly needs to find alternative sources of
growth at a time when he is having to find budget savings.
Sector players argue that private equity investment, while
sometimes about squeezing cash out of existing businesses, tends
to fuel the kind of swift growth and corporate change that an
economy bound in the models of the last century badly needs.
Thomson Reuters data shows volumes of European deals this
year have sunk 44 percent compared to a tripling of U.S.
takeovers, and France is among the most dramatic of slides.
Deal volumes in Germany doubled last year by contrast, and
in the first quarter even those in the Czech Republic, whose
economy is less than a tenth of the size, boasted volumes
several times higher than France's.
The collapse in Spain and Portugal has been comparable but
some investors believe those markets offer more upside because
of the tough reforms they have had to implement in return for
European bailout funds.
Elior, a French catering company owned by British private
equity group Charterhouse which had been expected to fetch up to
4 billion euros, has been delayed while the company seeks to
make an acquisition..
"When you go to your investment committee with an
opportunity in France, maybe it does currently receive
heightened scrutiny," said Jean-Michel Steg, a former Blackstone
executive who is now advising boutique bank Greenhill.
"Their (limited partners) will ask 'why are you investing my
money in France.'"
For some, the culprit is the anti-business rhetoric of
Hollande, whose government has scaled back the deductibility of
interest on loans from 100 percent to 85 percent. Higher capital
gains taxes, important for the sector, also loom.
"Employment laws and the confiscation of assets through tax
are not good for oiling the wheels of business,", said Jeremy
Coller from private equity firm Coller Capital.
Asked where he puts France on a scale of potential
investment targets he said "in the toilet".
There are some signs of life on the private equity market,
but they are chiefly for companies whose growth prospects are
driven by markets outside France.
PAI Partners on Monday agreed to buy Britain's R&R Ice Cream
from rival Oaktree Capital in a deal worth about 850 million
euros ($1.1 billion). Fashion brands Sandro, Maje and Claudi
Pierlot were snapped up by KKR after a hard-fought
auction earlier this year driven by their potential for
"The French market offers tempting brands (in the luxury
area, for example) whose growth is geared toward markets outside
of Europe," said a London-based banker, cautioning that:
"If you want to buy a company that is heavily dependent on
the French economy then you would have a hard time convincing