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Cablegate: Government Sells Additional 2.5 Percent Stake in France

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RR RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHFR #2825/01 1801547
ZNR UUUUU ZZH
R 291547Z JUN 07
FM AMEMBASSY PARIS
TO RUEHC/SECSTATE WASHDC 8631
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUCNMEM/EU MEMBER STATES

UNCLAS SECTION 01 OF 02 PARIS 002825

SIPDIS

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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 ECON PGOV FR
SUBJECT: GOVERNMENT SELLS ADDITIONAL 2.5 PERCENT STAKE IN FRANCE
TELECOM

Ref: Paris 2741

1. SUMMARY: To reduce the public debt, the government sold shares
in France Telecom, the French telephone provider, reducing its stake
in the company by 5.0 percent to 27.4 percent. The demand from
institutional investors was not sufficient to sell a larger stake.
The proceeds (2.65 billion euros or 3.6 billion USD) are symbolic
compared with the public debt, which is currently over one trillion
euros (1.5 billion USD). Proceeds from government real estate sales
have been more significant to reduce the public debt. END SUMMARY

Sale of a 5 Percent Stake in France Telecom fell short
--------------------------------_------------ ---------
2. On June 25, newly-appointed Finance Minister Christine Lagarde
announced a government plan to reduce its stake in France Telecom by
5.0-7.0 percent, and to fully use proceeds for public debt
reduction. The government intended to sell 130 million shares, but
that number could have been increased to 180 million, or 7 percent
of the capital, depending on the demand from institutional
investors. In less than 24 hours, the government sold shares to
institutional investors through "an accelerated book building
process." The government chose this period as France Telecom stock
price had already increased more than 26 percent in the last twelve
months. Morgan Stanley, one of the lead managers of the sale with
Morgan Stanley, Societe Generale, ABN Amro Rothschild, Citigroup Inc
and Goldman Sachs, expected France Telecom share to be priced
between 20.4 and 20.7 euros. However, stock market conditions were
less favorable than expected on June 26 as the CAC 40 index
decreased. The France Telecom share was priced at 20.4 euros, the
low end of the range expected by banks, and institutional investors
only applied for 130 million shares.

GOF keeps a 27.4 percent stake in France Telecom
--------------------------------------------- ---
4. The government now holds a 27.4 percent stake, directly or
indirectly, through ERAP, the public establishment that manages
France Telecom's capital. France Telecom was privatized in
September 2004, and the government lost its 33.3 percent blocking
minority in the company in August 2005 when it reduced its stake to
32.41 percent. Lagarde said that "the government intends to remain
a significant shareholder in France Telecom in the medium-term", in
a reply to unions which wondered when the sale of "family jewels"
would end. Three weeks earlier, one third of France Telecom
employees went on strike due to "pressure" they said they felt to
leave the company.

5. France Telecom is one of world's largest telecommunications
companies in terms of customer totals and revenue. On June 25,
2007, the company, which is quoted on the NYSE, filed its annual
report for the year 2006 with SEC on form 20-F, which presents
supplemental disclosures required under US GAAP and SEC regulations
applicable to the company, including a reconciliation of France
Telecom's consolidated financial statements prepared in accordance
with IFRS to US GAAP. See:
(http://www.francetelecom.com/en/financials
/investors/data/report/2006)

Privatization Proceeds to Reduce Public Debt
--------------------------------------------
6. The sale netted the government 2.65 billion euros (3.6 billion
USD), below the 3.8 billion euro government target. Proceeds will
help reduce the public debt, which stood at 1.142 billion euros or
63.7 percent of GDP in 2006, well above the 60 percent limit set by
the EU stability and growth pact. President Sarkozy's plan is to
balance the budget and reduce the public debt below the EU limit of
60 percent of GDP by 2012, when his mandate ends.

Future Government Privatization Plans Still Unclear
--------------------------------------------- ------
7. Observers had expected the government to sell shares in the
electricity utility company EDF in which it still holds an 87 stake,
while the law authorizes a reduction to 70 percent. But, Lagarde
said that the government "has no intention to decrease
significantly" its stake in EDF. The government is in the process
of reviewing its investment strategy for industrial purposes (in the
natural gas sector for instance) or for more political reasons (in
the sectors of defense and public safety). The Agency of Government
Holdings ("Agence des participations de l'Etat - APE") estimates
government shares in listed companies at 192.3 billion euros (259
billion USD) in 2006. The government has still stake in large
listed companies: 80 percent in the utility Gaz de France, 68
percent in Aeroports de Paris, 15 percent in Renault, 15 percent in
EADS, 31 percent in Safran, 27 percent in Thales and 19 percent in

PARIS 00002825 002 OF 002


Air France-KLM. The government has also stakes in a myriad of
minority or majority-held companies, notably in unlisted companies
including an indirect 84 percent stake in the nuclear group Areva.


Comment
-------
8. The government uses privatization proceeds to reduce the public
debt, as European regulations forbid using privatization proceeds to
reduce the budget deficit. The deficit stood at 2.5 percent of GDP
in 2006, but is likely to rise close to 3.0 percent by 2008 due to
the tax package (reftel). The money raised by the sale of France
Telecom shares is trivial compared to the 1.1 billion euro (1.5
billion USD) total debt. In a move to reduce the public debt, the
government has also been selling government real estate, and has
created a special government fund to collect 15 percent of those
sales. In 2006, the government raised 800 million euros (1.1 USD
billion) in real estate sales - or 1.2 billion euros (1.6 USD
billion) if including the real estate owned by Reseau Ferre de
France, the company that owns and maintains the French national
railway network. As usual, selling real estate and shares in
companies is a much easier way to reduce the public debt than paring
down government spending.

STAPLETON#

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