Cablegate: Gaz de France Share Sale Raises Over Four Billion

This record is a partial extract of the original cable. The full text of the original cable is not available.

191402Z Jul 05

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
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.

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