France faces tough choices on Areva T&D sale

The sign of France's nuclear reactor maker Areva is seen at the entrance of the French nuclear Tricastin site in southeastern France July 8, 2009.

PARIS (Reuters) - France may have painted itself into a corner by pushing state-owned nuclear power group Areva to sell its most profitable unit, and could end up weakening the very domestic industries it is trying to champion.

The government, which owns 93 percent of Areva, must choose between three bids for the Areva's electricity transmission & distribution (T&D) business -- from GE, Toshiba, and a French consortium of Alstom and Schneider Electric -- each of which potentially hurts French economic interests in different ways.

Should the government choose GE or Toshiba for the business, valued at 4 to 5 billion euros ($5.9-7.4 billion), it would in either case end up strengthening a company that competes with Areva in its core nuclear segment.

Choosing GE would hurt Schneider Electric by introducing a new competitor to the French firm's electricity distribution business.

Yet if the government chooses the all-French solution of Alstom-Schneider, as many believe President Nicolas Sarkozy is inclined to, then Areva may have to accept a lower price for its best asset.

"The French government has a bunch of unpalatable options," said Alex Barnett, an analyst at Jefferies. "They have to just choose the least unpalatable."

The French bidders want to chop the T&D business in half -- with Alstom running the transmission and Schneider the distribution -- potentially wounding a highly-profitable business for little discernible benefit.

French unions and Areva T&D's own managers have objected to this strategy, saying it will hobble the business and lead to job cuts. Areva T&D employs 31,000 people, with 5,000 in France.

In June, the government decided Areva should sell T&D -- despite the objections of CEO Anne Lauvergeon -- as a way to fund Areva's 11 billion-euro expansion plan and solidify its position as a global leader in nuclear technology.

The T&D business is Areva's cash cow, bringing in about 50 percent of its operating income.

WAYS OUT?

The government, analysts say, could end up trying to win more concessions from the bidders by winnowing the list down to two as early as Monday. Sources told Reuters this week that Areva would choose a shortlist of two bidders by Monday.

With such an approach, the government could designate Alstom-Schneider, its preferred choice, and one other bidder, according to analysts.

Then the government could use the non-French bid to pressure the French consortium to make concessions, such as guarantee jobs, raise the price, or abandon its plan to split up T&D and instead run it as a joint venture.

The process could end up being more like a state-asset sale than a typical auction, with the French government effectively holding an auction, ignoring it and then orchestrating a deal on its own terms, said one Paris-based analyst.

STATE PRIORITIES

The French government has a long history of intervening in mergers and acquisitions that affect domestic companies. In 2005 the government invoked "economic patriotism" to fend off a possible take over of France's Danone by Pepsi Co.

In 2007, it engineered the 90-billion-euro tie-up of Gaz de France and Suez, blocking Italy's Enel that was preparing a bid on Suez.

The approach harks back to France's dirigiste tradition pioneered by Jean-Baptiste Colbert, Louis XIV's finance minister, who directed the development of French industry in the 17th century.

The T&D saga shows how France's political class is often caught between its contradicting desires to direct domestic industry with an eye to protecting jobs while ensuring that its companies maximize profits.

In this case, the decision is even tougher because the state is the main shareholder of Areva, so in theory it should want to seek maximum profits for itself and the nuclear group by accepting the highest bid.

The government has not precluded foreign bidders, but it has built a safety valve into the auction, saying that offers would be evaluated not only according to price, but industrial strategy and social benefit as well.

It could also invoke strategic interest or national security to favor the French bid.

Still it would be hard for the government to walk away from a generous offer. "They (the government) created an auction," said Per Lekander an analyst at UBS. "You've got to have a good reason not to give it to the highest bidder."

TOUGH LOSS

The firm with the most to lose is Schneider, especially if GE wins the bidding for T&D, because its existing electricity distribution business would face a new competitor, according to two Paris-based analysts who declined to be named.

Last year Schneider earned more than half of its 18.3 billion revenues from electricity distribution which puts it in third place behind Swiss engineering group ABB Ltd and German conglomerate Siemens in terms of market share.

If GE were to win the T&D auction then it would become the second biggest in this global market, ahead of Schneider.

For Alstom, which manufactures trains and power station equipment, not getting its hands on T&D would be a missed opportunity, but would not hurt its existing businesses.

A loss would certainly be a blow to Patrick Kron, Alstom's CEO, however. He actually sold the T&D business to Areva in 2004, forced by then-finance minister Sarkozy, for 920 million euros to alleviate a debt crisis. Kron has always wanted to get the asset back, analysts say.

(Reporting by Leila Abboud and Nina Sovich, Editing by Sitaraman Shankar)