PARIS France Telecom FTE.PA on Thursday castigated the government, its largest shareholder, for derailing its plan to sell a majority stake in video-sharing website Dailymotion, reigniting debate about state interference in the French economy.
U.S.-based web portal Yahoo (YHOO.O) had been in talks to acquire a 75 percent stake in Dailymotion, the No. 12 video sharing website, which competes with Google's YouTube (GOOG.O).
But France's industry minister disliked the idea of one of France's most successful start-ups being "devoured" by Americans.
Arnaud Montebourg pushed for a more "balanced" partnership with 50-50 ownership, leading the talks to collapse and leaving France Telecom to search for another partner to help Dailymotion grow abroad especially in the key U.S. market.
Chief Executive Stephane Richard said state intervention was inappropriate.
"Dailymotion is a unit of France Telecom and not of the state. It is the company, its management and board that should manage this issue," Richard said in an interview with newspaper Les Echos.
He said he would search for another partner.
The episode is the latest clash between President Francois Hollande's Socialist government and business leaders, one of the earliest being his campaign pledge to impose a 75 percent super-tax on high earners.
France's technology sector is one of the economy's bright spots, with the country ranking third in Europe behind the U.K. and Germany in terms of venture capital investment last year.
Jean-David Chamboredon, long-time venture capital investor in France and head of the ISAI fund, said France Telecom was not capable of giving Dailymotion global reach and Montebourg's decision was a "big mistake."
"Yahoo would have had no reason to hollow out Dailymotion. On the contrary it would have likely made the company stronger and possibly hired more video engineers in France because they cost less than in Silicon Valley," he told Reuters.
"Investors who might want to be active here could think twice out of fear of government interference," he said.
Some of France's largest start-ups have been acquired by foreign investors without fuss.
Japan's retailer Rakuten 4755.OS bought e-commerce site Price Minister in 2010 to expand into Europe while Germany's Axel Springer (SPRGn.DE) acquired real estate listing site SeLoger.com last year. Both ended up hiring workers in France after they were bought out.
Government spokeswoman Najat Vallaud-Belkacem said the Dailymotion intervention was in France's interest, especially since its sovereign wealth fund had backed Dailymotion.
"The stakes for the government were to avoid the possibility of Dailymotion disappearing, because that was the risk of an unequal accord with Yahoo," she told a weekly news briefing.
It was not clear whether the Socialist government was unified about scuppering the deal.
Montebourg told reporters he and Finance Minister Pierre Moscovici had worked together but Moscovici told a news conference: "I was not particularly involved in this case... there was no joint decision."
Fleur Pellerin, the junior minister who handles the telecom and technology sector, has stayed quiet in recent days and her name was absent from Montebourg's announcement of his veto.
France Telecom is used to grappling with influence from the state, which owns 27 percent of the group. Its chief executive is named by the government and it does not have a free hand in laying off workers.
In his interview with Les Echos, Richard dismissed the idea of the state injecting cash into Dailymotion.
"We are not looking for financial backers. Our priority is to find a partner who can help develop Dailymotion outside Europe," he said.
(Reporting by Leila Abboud and Ingrid Melander; Editing by David Holmes)