Framatome, Siemens Plan
To Pool Their Nuclear Units
By CHARLES FLEMING and WILLIAM BOSTON
Staff Reporters of THE WALL STREET JOURNAL
Facing a dearth of orders for new nuclear plants, but with steady demand for maintenance work on the world's 442 existing but aging reactors, France's Framatome SA and Germany's Siemens AG said they would pool their nuclear businesses into a single company.
The new company, which hasn't yet been named, will be managed by its state-owned French parent, but Siemens will retain a blocking minority interest of 34% and senior executives there stressed that the German engineering company remains committed to the nuclear-power industry.
The two partners have already worked together in the past 10 years on building nuclear-power plants outside France and Germany through a joint venture called Nuclear Power International. The announcement comes as little surprise as both sides have been in negotiations since the first quarter. The latest deal extends the cooperation into their home markets and across the full range of nuclear services, including nuclear fuel and plant maintenance.
'Need for Consolidation'
"This is driven by the need for consolidation in a low-growth industry where the main business interest lies in plant maintenance and nuclear fuel," said Framatome Chairman Dominique Vignon in a telephone interview.
With the important exception of China, which intends to build between 10 and 15 plants over the next 10 years, and Turkey, which has invited tenders for one plant, world-wide demand for new nuclear plants has all but dried up. Indeed, a number of countries, notably Germany and Sweden, want to close down some of their existing plants ahead of schedule. Worries about the risk of nuclear accidents is one important factor hampering the industry, but the sheer cost of building new plants is also slowing demand.
"Liberalization of energy markets is driving people towards smaller projects, with lower capital costs, that pay back more quickly: i.e., gas," said Stewart Gray, an energy consultant at Wood Mackenzie in Edinburgh. He estimated that a gas-powered energy plant costs only about $450 (439.97 euros) per kilowatt to build, compared with about $2,000 per kilowatt for a nuclear plant, although he added that a nuclear plant will prove cheaper to run over the long term.
Ironically, however, environmental worries could prove to be the savior of the nuclear industry and companies like the new Framatome-Siemens venture. That's because increasingly strict emission controls will make power plants using coal, gas or oil more expensive to operate, thus encouraging utilities to retain their nuclear plants which don't emit any gases. "Life extension of existing nuclear plants may start to appear an increasingly attractive and commercial option [and] the impact of the CO2 [carbon dioxide] is likely to shift matters in a pro-nuclear direction from the political standpoint as well," said Mr. Gray.
Industry Giant
Total nuclear-related sales by the new venture's partners amounted to 3.1 billion euros last year, which would make the venture the largest player in an already concentrated industry. Among the handful of companies active in the business are Westinghouse Electric Co., recently acquired by British Nuclear Fuels Ltd., General Electric Co. of the U.S. and Swiss/Swedish engineering group ABB Ltd.
Siemens and Framatome have worked together recently on developing a new form of nuclear power plant, known as the European Pressurized Reactor, but have so far failed to find any opportunity to build one. Framatome's Mr. Vignon said that the new company -- which, subject to regulatory approval, will begin operating in the third quarter of 2000 -- will concentrate on achieving cost savings at the two partners' commercial arms and their research and development laboratories. He added that this would have limited impact on the two groups' work forces in Europe, but noted that in the U.S., where both groups are involved in nuclear-fuel plants, "decisions will have to be taken." Framatome employs 9,000 people in all, and Siemens's nuclear business employs 4,100 people.
Siemens shares rose sharply on the news, which investors welcomed as the latest example of the German group's strategy to form partnerships in business areas where it believes it cannot become a global leader on its own. Earlier this year, the group made a similar move in the computer business, forming a venture with Japan's Fujitsu Ltd. that strengthened the company's position in the European computer market.
Siemens shares rose 4.9% to 114.70 euros ($117.32) on the Frankfurt stock exchange.
Fear of New Regulation
Norbert Koenig, chief financial officer of Siemens's Erlangen-based power-plant division KWU, said the agreement with Framatome wasn't a prelude to its exit from the nuclear business. He said Siemens remains committed to nuclear technology and that the new venture would provide it access to a larger market as well as minimize its exposure to the whims of Germany's center-left government, which is drafting a plan that could spell the end of nuclear-power usage in the country. "Through its international character, the joint venture is less dependent on political developments in individual countries," said Mr. Koenig.
Framatome's capital structure was recently altered after the company's only private-sector shareholder, Alcatel SA, sought to divest itself of its 44% stake. As part of a government-sponsored solution, state nuclear-fuel processor Cogema agreed to take a 34% stake in Framatome, while Alcatel was assured that Framatome shares would be publicly listed within two years in order to allow it to dispose of its remaining shares.
However, French Industry Minister Christian Pierret said Monday that the deal wouldn't precipitate a privatization and did not question its impact on Framatome's role public-sector company.
--David Woodruff contributed to this article.
Write to Charles Fleming at charles.fleming@wsj.com, William Boston at william.boston@wsj.com and David Woodruff at david.woodruff@wsj.com
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