You don't have to be American to be screwed by the French.....
Saving a Company, Paris Sets
A Pattern of Flouting EU Rules
Bailout of Alstom Also Eases
Perils for Three French Banks
By JOHN CARREYROU
Staff Reporter of THE WALL STREET JOURNAL
PARIS -- On Christmas Eve, Carnival Corp. expects to take possession of the 1,132-foot-long Queen Mary 2, the biggest cruise ship ever built. The Miami cruise operator can thank French taxpayers for the on-time delivery.
This month, France threw a €3.1 billion ($3.49 billion) lifeline to the ship's builder, Alstom SA. The company had been weighing whether to declare bankruptcy. Without help, it would have gone under.
For the French government, letting Alstom go bankrupt was unthinkable. The company employs 26,000 workers in France and 110,000 world-wide. Besides operating the naval yards in Brittany, where the Queen Mary 2 is being assembled, Alstom makes the high-speed TGV train, a jewel of Gallic engineering and centerpiece of the country's modern rail system. Because its biggest creditors are France's three largest banks, a bankrupt Alstom could have dealt a major blow to the country's financial system.
So France did what European Union rules are supposed to forbid. It bailed out Alstom with a generous package of state aid, undercutting the EU's attempt to keep a level playing field for all European companies. The bailout marks the third time in two years Paris has upset the EU by rescuing a French company. In 2001 and 2002, it lent €450 million to ailing computer maker Groupe Bull SA. Last fall, it extended a €9 billion credit line to France Telecom SA, which had racked up one of the world's biggest debt loads.
The trio of rescues is part of a broader pattern of flouting the EU's economic rules. For the second year in a row, France is on track to exceed the union's budget-deficit cap, which is meant to provide a stable economic environment for the euro. France has also resisted opening up its power market even as its state-owned power company, Electricite de France, has expanded across Europe through acquisitions.
France's behavior underscores how the EU, with a combined market second only to America's, is showing strains even as the union pushes ahead with a constitution and prepares to take in 10 new members, from Poland to Malta. The cheating has angered some EU members and could weaken support for the EU's often-painful rules.
"Not only do the French not seem to manage to adhere to the rules, but they don't even seem to try," says William Lelieveldt, a spokesman for Dutch Finance Minister Gerrit Zalm. Mr. Zalm has called on the EU to fine France.
Alstom's troubles began in June 1998. In one of Europe's largest initial public offerings, the company's two corporate parents, France's Alcatel SA and Britain's Marconi PLC (then known as GEC), sold stock in their joint engineering unit. On the day Alstom's shares began trading in Paris, London and New York, the company wowed Wall Street with a mockup that made it look as if a TGV train was breaking through the pavement in front of the New York Stock Exchange.
The stunt belied a sober reality: Just before the IPO, Alcatel and Marconi had drained Alstom's coffers. Eager to fund expansion into the then-booming telecommunications sector, they made the company pay them a €1.2 billion special dividend. That left the newly independent Alstom, a heavy-engineering company that must make costly investments in big projects before reaping profits from them years later, with a fragile balance sheet.
[Pierre Bilger]
Alstom's chief executive, Pierre Bilger, had fought the dividend behind the scenes. But he remained outwardly optimistic that Alstom could quickly earn the money back. Mr. Bilger had chafed under the oversight of his two shareholders and he cherished the vision of turning Alstom into an industrial giant to rival General Electric Co. and Germany's Siemens AG. He forecast double-digit profit growth for years to come.
But Alstom was wrestling with a strategic impasse at one of its three businesses, power-generation equipment. A longtime deal with GE was unraveling, under which Alstom licensed GE's technology to make electricity-generating gas turbines. Now it needed to find another way to remain in the business.
In March 1999, it hit on a solution: a joint venture with Swiss-Swedish conglomerate ABB Ltd. The two would pool their power units to create the world's biggest power-equipment maker. But the venture soon hit snags, and after a year of squabbling Alstom agreed to buy ABB out.
Within weeks, Alstom engineers in the field discovered that ABB's gas turbines, the main asset Alstom got in the buyout, had serious defects. By then, ABB had sold 80 of the $100 million machines to power plants all over the world.
In July 2000, Alstom issued a vague statement about the problem but declined to estimate the cost of repairing the turbines. It was the first in a series of opaque disclosures, and the pattern of dribbling out bad news eroded the trust of investors and caused Alstom's shares to tumble.
The poor disclosure reflected Mr. Bilger's indecisiveness rather than any intent to mislead, say former colleagues. He tended to mull over problems for weeks and sometimes months when a few days might have sufficed, they say. He also liked to build consensus among his managers rather than impose decisions. The result was a plodding management unsuited to handling a crisis.
In an interview, Mr. Bilger says he "tried to inform the market in real time and to the best of our ability at each stage of our problems." But he faults himself for not explaining better to investors the engineering industry's long-term horizon, where contracts take years to pay off and technical mishaps sometimes take years to resolve. "Perhaps I could have done a better job of explaining that," he says.
Between July 2000 and April 2003, Alstom had to take €4 billion in charges to fix the turbines and compensate customers, sending its debt soaring. Mr. Bilger says there was no way to predict in mid-2000 that the problem would snowball. He calls the faulty turbines an "act of God" that resulted "in a huge technical disaster" and sees the deal with ABB as an unfortunate twist of fate. A spokesman for ABB, Thomas Schmidt, said, "Alstom acquired the business from us with all the liabilities. They agreed to indemnify us for future claims."
But there were other problems. In September 2001, a cruise-ship customer, Renaissance Cruises of Fort Lauderdale, Fla., filed for bankruptcy protection. Alstom had advanced Renaissance money to pay for eight ships, a risky practice known as vendor financing. At first, Mr. Bilger refused to say how much the incident would cost. After the company got hammered by investors and analysts, his communications team persuaded him to give the market a figure. In an interview with a French newspaper, he estimated "tens of millions of euros." Total losses related to Renaissance have reached €140 million.
In early 2002, Mr. Bilger recruited longtime friend Philippe Jaffre, a respected former CEO of oil group Elf, as chief financial officer in a final effort to turn the company around. Together, they unveiled a plan named "Restore Value," under which Alstom would slash debt with asset sales and a capital increase. During the following year, shareholders took to mocking the plan's name as Alstom shares lost more than 90% of their value.
[Patrick Kron]
This March, Alstom conceded that "Restore Value" had failed. The board asked Mr. Bilger to step down and handed the reins to his No. 2, Patrick Kron. Mr. Kron replaced "Restore Value" with the "New Action Plan," forecasting profitability in 2006.
France's finance ministry was anxiously watching developments at Alstom. So, Mr. Kron paid a courtesy visit to Francis Mer, the finance minister. Mr. Kron assured Mr. Mer that he had a handle on the problems, according to Mr. Mer and other people familiar with their conversation. Mr. Mer was relieved.
But things only worsened. Worried that Alstom would go bust, prospective customers declined to place orders. Sales dried up. Nick Salmon, Alstom's chief operating officer, says a power-plant customer in New York showed up for a meeting to discuss a contract with bankruptcy lawyers in tow. The New York customer, itself operating under Chapter 11, wanted to know how the contract would be honored if Alstom filed for bankruptcy under the French system.
Then Mr. Kron began receiving anonymous letters from American employees warning him that the management of Alstom's U.S. transport unit had understated costs on a New Jersey railcar project. On July 1, Alstom announced that the Securities and Exchange Commission and the Federal Bureau of Investigation were looking into the matter.
[Francis Mer]
The next day, Messrs. Kron and Jaffre pleaded with irate shareholders at Alstom's annual meeting to let them raise €600 million with a share issue, the second in a year. Though they gave their OK, shareholders booed the two men, and lashed out at the board for having granted Mr. Bilger €5.1 million in severance and salary. Under intense public pressure, Mr. Bilger said Monday he would return €4.1 million to the company.
With billions of euros of loans and guarantees at risk, France's three largest banks -- BNP Paribas SA, Societe Generale SA and Credit Agricole SA -- decided to act. They lobbied the finance ministry to merge Alstom with state-owned nuclear engineering company Areva SA, say people familiar with the situation. For the banks, the deal was advantageous because it would in effect make the state Alstom's guarantor, as the merged company would be state-controlled.
Mr. Mer rejected the idea -- but he was now in the rescue game. Sensing that Alstom's position had sharply deteriorated, the finance ministry hired Merrill Lynch as an adviser.
On the evening of July 27, just back from a trip to Latin America, Mr. Mer was briefed by aides on Alstom's dire situation. He summoned Mr. Kron, who told him Alstom would go bankrupt without state aid, people familiar with the meeting say. Mr. Mer told his aides to find a solution, albeit one that would keep state intervention to a minimum. For Mr. Mer -- an outspoken believer in private enterprise, who as an executive had engineered the successful privatization of steelmaker Usinor in 1995 -- it was a sharp about-face.
Ten days of frantic negotiations ensued among Alstom's management, the banks and the finance ministry. With foreign banks balking at putting up more money to save a French company, Mr. Mer tried to rally European power brokers. He phoned Germany's finance minister for help in getting the ear of German bankers and asked the governor of Spain's central bank to put pressure on Alstom's Spanish creditors.
On Aug. 5, a deal was reached under which the French state would acquire a 31.5% stake in Alstom -- just low enough under French stock-market rules not to have to buy the whole company.
With leaks of the bailout all over the French press, Mr. Mer called European Competition Commissioner Mario Monti to brief him. Mr. Monti, the antitrust czar who was still wrangling with France over its support of France Telecom, urged Mr. Mer to give him details of the plan quickly so he could determine whether the aid was legal.
At a news conference the next day, Mr. Mer argued that Alstom's rescue was in the interest of all of Europe, not just France. The company employs 75,000 workers on the Continent, he said, has thousands of European suppliers, and owes money to European banks. But when asked whether the government couldn't have better anticipated Alstom's crisis, Mr. Mer seemed to forget what he had just done.
"It's not my place, nor that of this ministry, to deal with the crisis of a private company," said the man who spearheaded one of Europe's biggest state bailouts of a corporation. "I remind you that Alstom is a private company."
Write to John Carreyrou at john.carreyrou@wsj.com
Updated August 19, 2003 12:26 a.m.
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