US embassy cable - 05PARIS4999

UNCLAS SECTION 01 OF 02 PARIS 004999 
 
SIPDIS 
 
PASS FEDERAL RESERVE 
PASS CEA 
STATE FOR EB and EUR/WE 
TREASURY FOR DO/IM 
TREASURY ALSO FOR DO/IMB AND DO/E WDINKELACKER 
USDOC FOR 4212/MAC/EUR/OEURA 
 
E.O. 12958: N/A 
TAGS: EFIN, ENRG, ECON, PGOV, FR, French Business 
SUBJECT:  GAZ DE FRANCE SHARE SALE RAISES OVER FOUR BILLION 
EUROS 
 
Ref: A. 04 Paris 6157 
 
B. Paris 2721 
C. Paris 4900 
 
1. SUMMARY.  Sixty years after the nationalization of the 
electricity and gas industries, the government has turned a 
historical page, selling shares in gas utility Gaz de France 
(GDF) for the first time.  The GOF will keep a 79% stake in 
the partially privatized company.  The sale process, 
including sales of shares to company employees, is scheduled 
to end in September.  The government will use the 2.5 
billion euros in expected proceeds to reduce public debt and 
to fund "innovative industries."  GDF also sold new shares 
and plans to use its two billion euros in new capital to 
expand and to prepare for increasing national and 
international competition.  END SUMMARY. 
 
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GOF Sells Shares, and GDF Creates New Shares 
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2.  The AMF (French equivalent of the SEC) gave the green 
light to the partial privatization of Gaz de France (GDF) on 
June 23.  Both state-owned shares and new shares created by 
Gaz de France (GDF) were offered.  The indicative price 
range for the global placement was between 20.7 and 24.0 
euros.  For the open price offer, the indicative range was 
between 20.50 and 23.80 euros.  Investors had from June 23 
until July 6 to submit their offers.  Caylon, a unit of 
Credit Agricole, was the leading bank conducting the sale. 
 
3.  Based on the maximum amount of stocks to be sold, the 
government is expected to keep a 79.45% stake in GDF.  By 
law (ref A), the GOF must retain at least a 70 percent stake 
in the company. 
 
4.  Investors leapt at the chance to get a piece of the 
world's biggest initial public offering in three years.  The 
GDF offering was oversubscribed 27 times by institutional 
investors.  Fund managers lined up for many more shares than 
were offered, at the top end of the 20.7 to 24.0 euro price 
range.  Interestingly, around one-third of demand came from 
institutional investors in Paris, one third from investors 
in London, and 10% from investors in New York.  Demand for 
the offer to individuals has been similarly strong with more 
than 3.2 million individuals responding to GDF's offer.  GDF 
had advertised its plan to increase dividends paid to 
shareholders by 40% in 2006, and double them in 2007 and 
2008. 
 
5.  A further 15% of shares are expected to go to GDF 
employees at preferential conditions.  GDF employees, and 
unions have opposed the sale, fearing the partial 
privatization of GDF would pave the way for job cuts, erode 
workers' rights and would be a "catastrophe" for the public 
service.  Polls conducted in June showed a different picture 
as 60% of GDF employees and retirees wanted to become 
shareholders, while 20% were opposed to the sale.  According 
to preliminary information, one out of two employees bought 
GDF shares.  Delivery-settlement of shares to employees and 
retirees is planned for September 8. 
 
6.  Existing and new GDF shares were listed as "GAZ" on the 
Euronext-Paris Eurolist starting on July 8.  GDF shares 
increased to 27.8 euros in the first 15 minutes of trading. 
GDF, which describes itself as one of the largest 
"integrated and European" suppliers of gas, had a 27.1 
billion euro capitalization (based on 27.8 euro price). 
 
7.  GDF issued new shares to bolster its capital funds. 
These new funds (around two billion euros) will be used to 
carry out GDF's plan to expand in Europe, and face 
competition from other companies.  The company expects 
competition to increase significantly after July 1, 2007, 
when all customers must be allowed to chose alternative gas 
and electricity suppliers (a requirement under EU 
directives).  In order to stay competitive, GDF will have to 
make significant investments in transport and distribution, 
as well as exploration and production. 
 
8.  The GDF sale share is expected to raise close to 2.5 
billion euros for the government, after it exercises its 
option to issue more shares in light of strong demand. 
Proceeds will be used to cut spiraling public debt 
(according to EU rules, privatization proceeds cannot be 
directly used to reduce the government deficit), and help 
fund the new Agency for Industrial Innovation (ref C) and 
the national research agency. 
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Success Will Embolden GOF to Privatize Electricity Utility 
--------------------------------------------- ------------- 
9.  Finance Minister Thierry Breton and Industry Minister 
Francois Loos welcomed the success of the GDF share 
offering.  Speaking after Paris lost the Olympic Games to 
London, Breton said this was "very good news for those who 
think France is a bit too morose," also stressing the sale 
contributed to reinforce the "popular" shareholding, an 
important issue to the government, which is seeking to 
develop new financial culture (ref B). 
 
10.  The success of the offering has given impetus to the 
government's plan to move forward with other privatizations, 
including the full privatization of highway companies APRR, 
AF, and Sanef, which was announced on July 18, and the 
eventual partial privatization of electricity utility 
Electricite de France (EDF) by the autumn.  On July 8, the 
government published a decree authorizing the sale of EDF 
shares to private investors.  The three toll-road companies 
together could bring in as much as eleven billion euros into 
GOF coffers.  The EDF offering is expected to raise 8 to 11 
billion euro in capital to ease the company's stretched 
balance sheet and fund its plans in Europe.  Breton said 
that "the government is continuing to encourage the 
development of state-owned enterprises in the energy 
sector."  Reacting to this news, unions called for a 
counterattack in September.  But, Breton warned that the 
government had to pursue the preparatory work for EDF's 
stock exchange listing, notably setting the conditions of 
the offer reserved for employees.  Government privatization 
plans still include Aeroport de Paris and possibly Areva in 
2006. 
 
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Comment 
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11.  The success of the GDF partial privatization will 
certainly help the government, which appears firm in its 
desire to open the capital of EDF next.  Nonetheless, EDF's 
partial privatization has larger financial stakes than GDF, 
and will be more controversial and, hence, more politically 
risky.  The government will remain the major shareholder of 
both energy utilities.  Nevertheless, privatizations are 
helping the GOF to raise desperately needed funds to cut 
public debt and support industrial projects.  End comment. 
 
STAPLETON