US embassy cable - 05PARIS5441

C O N F I D E N T I A L SECTION 01 OF 04 PARIS 005441 
 
SIPDIS 
 
STATE FOR EB, EUR/WE AND EUR/ERA 
 
E.O. 12958: DECL: 08/10/2010 
TAGS: EINV, ECON, EIND, PGOV, FR 
SUBJECT: ECONOMIC PATRIOTISM, ECONOMIC INTELLIGENCE, AND 
PROTECTING FRANCE'S CORPORATE "JEWELS" 
 
REF: 04 PARIS 0626 
 
Classified By: Kenneth Merten, ECON, for reasons 1.4 (b) and (d). 
 
Summary 
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1.  (C) As reported reftel, the GOF continues to enact 
elements of Parliamentarian Bernard Carayon's "economic 
intelligence" program, as prescribed in his 2003 report.  An 
important next step will be debate and ultimately passage of 
legislation (inspired by the U.S. Exon-Florio laws) which 
would define which industrial sectors merit protection from 
foreign control for "national security" reasons.  The 
legislation is also set to establish a mechanism for vetting 
attempted takeovers.  The rumored July takeover of Danone by 
PepsiCo and Prime Minister de Villepin's public defense of 
France's national "jewel" has been the business story of the 
summer in France.  However, de Villepin's call for protection 
of Danone can be explained as much by political opportunism 
as by his belief that Danone is a "strategic" company that 
needed protection.  De Villepin, Carayon, and others in the 
GOF continue to see France as having fallen behind 
competitors such as the U.S. and they are determined to give 
the GOF the tools necessary to support strategic sectors. 
The French private sector is far from unified in its support 
for de Villepin's pronouncements on Danone; some appreciate 
the government attention, while others are wary of 
interference in the market.  As discussion of the foreign 
takeover legislation proceeds his autumn, it is in the USG's 
interest to urge the French to learn from our experience - 
both good and bad - with Exon-Florio (and CFIUS) and to 
stress the primary importance of shareholder rights and the 
role of the market. End Summary. 
 
The Danone Case: Perfect for Grandstanding... 
--------------------------------------------- 
2.  (U) In late-July 2005, when PepsiCo was rumored to have 
been considering a hostile takeover of French food group 
Danone, Prime Minister Dominique de Villepin issued a veiled 
warning to any potential foreign bidders, declaring that 
Danone was one of France's industrial "jewels" and saying 
that the GOF will strive "to defend the interests of France." 
 
 
3.  (C) The current government's emphasis on employment 
creation combined with the public's fears of outsourcing and 
job losses created the perfect backdrop for what French 
economist Elie Cohen has described as Danone's carefully 
orchestrated campaign against a Pepsi takeover "threat." 
While Danone could hardly be construed as a strategic 
company, President Chirac and PM de Villepin may have seen an 
excellent - and cost free - opportunity to score political 
points by publicly "defending" a French company with a call 
to "economic patriotism."  Last year, then-Finance Minister 
Sarkozy initiated a similar public response by persuading 
Novartis, the Swiss pharmaceutical group, not to bid for 
Aventis against Sanofi, a French rival. 
 
4.  (SBU) While the media focused on the symbolism of a 
situation pitting a French water and dairy group against a 
U.S. soft-drink giant, Chirac and Villepin pointed to the 
need to reinforce the capital of large French corporations by 
amending French commercial law, implementing the EU Takeover 
Directive, and introducing American-style institutional 
pension funds in France.  These measures were first outlined 
in Carayon's 2003 report (reftel) on "Economic Intelligence, 
Competitiveness and Social Cohesion," commissioned by 
then-Prime Minister Jean-Pierre Raffarin. 
 
...But Linked to Increased Foreign Ownership of French Firms 
--------------------------------------------- ------- 
5.  (C) Referring to Danone-Pepsi in a typically equivocal 
statement, President Chirac said that while "it was out of 
the question to oppose any takeover of a French company per 
se," he said he remained concerned about the lack of a solid 
core of French shareholders among major French corporations 
such as Danone.  The lack of French capital in French 
companies, he said, had a potentially negative impact on the 
French industrial base and thereby on employment.  Chirac's 
statement draws attention to a problem long emphasized by 
French economists: the fragmentation of shareholding as 
France moved away from the stable cross-holding networks of 
its national champions in the late 1980s and 1990s.  Some 
French economists have argued that the opportunities created 
by French privatizations have mostly benefited foreign 
investors because of France's lack of institutional pension 
funds.  By 2003, the CAC40 (the top forty companies quoted on 
the Paris stock exchange) was more than 50 percent 
foreign-owned, with around a quarter of the shares in U.S. 
and British hands.  This trend has increased in recent 
months, according the latest study by French financial 
consultancy TLB.  This study shows that foreign investment 
funds owned 61.4 percent of the shares of companies in the 
CAC40 index last June, an increase from 55 percent in March 
2005. 
 
6.  (SBU) In fact, many icons of French capitalism are 
already owned by foreigners.  With no fanfare, U.S. 
investment fund Starwood Capital recently acquired French 
luxury group Taittinger, which produces champagne and owns 
the historic Crillon Hotel, which had been the last five-star 
hotel in Paris still in French hands.  Danone, allegedly 
targeted by Pepsi, is 42 percent owned by foreign investors, 
including the 24 percent stake held by U.S pension funds. 
Construction firm Lafarge, chaired by Jean-Louis Beffa, is 
50.44 percent owned by non-French investors.  All in all, 
France's National Economic Statistics Institute INSEE 
concludes that some 17,000 companies out of a total of 2.5 
million companies (mostly small or very small companies) are 
owned, 50 percent or more, by foreign investors. 
 
"Economic Patriotism" Not Universally Supported 
--------------------------------------------- -- 
7.  (C) It would be wrong to assume that Chirac and de 
Villepin's statements about Danone and "economic patriotism" 
- a phrase first coined by Carayon in 2003 - were universally 
supported.  Many in the private sector (and some in 
government) lamented the government's public interference in 
what should have been a shareholder decision.  Finance 
Minister Breton told us that he did not support the positions 
taken by "some politicians."   He stated publicly that France 
benefits from foreign investment and that the country has a 
legal framework in place to handle takeovers.  The 
government's job, he said, should be to ensure that the laws 
were obeyed. 
 
8.  (SBU) In the private sector, several CEO's have publicly 
warned the GOF against a possible drift towards "economic 
nationalism."  Some observers liken France's "economic 
intelligence" drive to traditional state interventionism or 
Gaullist-style industrial policy.  The policy has already 
driven a wedge between the "patriotic" CAC40 CEOs (Arnaud 
Lagardere of defense giant Lagardere, Jean-Francois Dehecq of 
Sanofi-Aventis, and Jean-Louis Beffa of glass firm Saint 
Gobain) and the strictly pro-market proponents (Hubert de 
Castries of Insurance firm AXA, Jean-Rene Fourtou of Vivendi 
Universal, and Patrick Ricard of drinks giant Pernod Ricard) 
who are wary. 
 
9.  (SBU) Some in the private sector have also noted that 
French concern about foreign takeovers of national champions 
is hypocritical given several recent high-profile foreign 
acquisitions by French companies.  For instance, recently, 
France Telecom successfully fought off two powerful equity 
consortiums in order to buy 80% of Amena, the Spanish mobile 
phone group, for 6.4 billion euros.  So far this year, French 
acquirers have bought foreign businesses worth almost $34 
billion, higher than the $28 billion for all of last year, 
marking the highest level of activity since the height of the 
2000 bull market, according to economic data and analysis 
company Dealogic. 
 
Pending Economic Intelligence Legislation 
----------------------------------------- 
10.  (SBU) France's "economic intelligence" policy also plans 
to tighten foreign investment controls.  French legislation 
on foreign investment has been revised three times since the 
Carayon report was first published in 2003 and we expect it 
to be further strengthened by government decree in September. 
 Currently, Article 151-3 of the French Monetary and 
Financial Code provides that the Ministry of Economy and 
Finance must approve all foreign investment that a) could 
impair France's public order, public security, or national 
defense interests, and b) is related to the research, 
production or selling of arms, ammunitions, powders and 
explosive substances.  Special conditions can be attached to 
the Ministry's authorization to ensure that the planned 
investment does not undermine France's national interest.  A 
GOF refusal can be appealed before a French administrative 
judge.  The penalty for an investor who contravenes these 
rules can amount to up to double the illegal investment. 
 
11.  (SBU) A Government decree is being drafted which will 
seek to further define the strategic sectors where foreign 
acquisitions require government authorization.  These 
restrictions could cover companies involved in defense, 
biotechnologies related to combating terrorism or pathogen 
agents, the security of information systems, cryptography, as 
well as activities concerning dual-use technologies.  The 
decree could also redefine the threshold for "control" of a 
company, currently set at 33.33 percent.  A condition might 
be added against a foreign investor holding less than a third 
of a French company but likely to "exert a decisive 
influence."  Article 151-3 of the French Monetary and 
Financial Code has already prevented two U.S. companies from 
acquiring French producers of aeronautics components and 
night vision equipment. 
 
12. (SBU) As part of his on-going push to protect strategic 
industries in France from foreign control, National Assembly 
member Bernard Carayon is organizing a colloquium on 10 
October entitled, "Foreign Investment and National Security." 
 The colloquium, to which Embassy and U.S. Treasury 
Department officials have been invited to speak, will address 
the possibility of creating a French equivalent to the 
Committee on Foreign Investment in the United States (CFIUS) 
and a French version of the Exon-Florio provisions.  Embassy 
encourages USG participation in this timely colloquium and 
would welcome talking points on these issues. 
 
Other Related Initiatives 
------------------------- 
13.  (SBU) Last March, France's Senior Economic Intelligence 
official Alain Juillet announced a new investment fund to 
support unquoted strategic start-ups in the defense sector. 
The two-tier system involves public and private players.  A 
select committee made up of representatives of France's 
strategic ministries (Economy, Foreign Affairs, Research, 
Defense, Interior) will choose the start-ups that will 
benefit from the expertise of three management funds (called 
Occam, Emertec Gestion and ACE Management).  The Government 
select committee ensures that investment decisions will be 
made on the basis of France's national interest.  The funds 
will focus on projects in information technology, security, 
aeronautics, defense and nanotechnology. 
 
14. (SBU) As "economic intelligence" developed into a more 
comprehensive public policy last year (reftel), the French 
government began creating economic intelligence units in the 
several French ministries, beginning with the Economy, 
Finance and Industry Ministry, which set up a "General 
Delegation for Economic Intelligence" in October 2004. 
Headed by Francois Asselineau, the office has already played 
a leading role in drafting upcoming investment control 
legislation.  Last December, then-Foreign Affairs Minister 
Michel Barnier appointed former Minister-Counselor for 
Economic and Commercial Affairs at the French Embassy in 
Washington, Jean-Baptiste Main de Boissiere to be the Foreign 
Ministry's new "Delegate General for Economic Intelligence." 
Boissiere's job will be to develop contacts and exchange 
information at the EU level and to train French diplomats in 
"economic intelligence". 
 
15. (SBU) In addition to beefing up its central bureaucracy, 
Prime Minister de Villepin has asked all French prefects to 
be on the lookout for small and medium-sized strategic 
companies within their jurisdiction.  The Interior Ministry 
will coordinate the actions by prefects (local national 
government representatives) with local authorities and 
private sector actors as part of the government's 
"territorial intelligence" effort in nine French pilot 
regions.  France's private sector will also launch a 
structure of its own this fall, with the French Federation of 
Economic intelligence set up by former counter-intelligence 
Chief Admiral Pierre Lacoste. 
 
Comment 
------- 
16.  (C) The current government believes that its "economic 
patriotism" and "economic intelligence" approaches are fully 
justified by the need to allay the French people's fears of 
high unemployment and a loss of national identity. 
Ironically, the GOF is as much on the offensive against its 
own antiquated laws, which prevent the development of a 
business and shareholding culture in France, as it is against 
what it considers to be outside threats to its national 
economic interests.  Carayon's October colloquium on the 
upcoming takeover law revisions is "inspired" by the U.S. 
experience with controlling foreign investment through the 
Exon-Florio Act.  Carayon's "economic intelligence" proposals 
seek to level the playing field with France's trading 
partners.  Much of what the report suggests can help France 
reform outdated legislation and practices.  However the whole 
nature of the "economic intelligence" exercise and the 
Carayon Report's imperfect understanding of the tools at 
other countries' disposal, lends itself to demagoguery and 
distortion.  (His report was cited in articles in early 2005 
in a regional newspaper implying that the Embassy's APP's 
were part of an organized U.S. economic intelligence effort 
to spy on key French firms.)  Our challenge in France will be 
to ensure that there is an appropriate understanding and 
characterization of U.S. practices and policies.  End 
Comment. 
 
 
 
 
 
 
 
 
 
 
Hofmann