Legal aspects of the French privatization program: review of the Pechiney privatization as a practical case.

• Author: Borde, Dominique
• Position: Privatization: Political and Economic Challenges

Description of the Privatization Program

Under a law dated 19 July 1993, providing for the second privatization program, the French government generated a list of 22 public sector companies to be privatized, including Banque Nationale de Paris (BNP), Bull, Companie Nationale Air France, Credit Lyonnais, Rhone Poulenc, Elf-Aquitaine, Assurances Generales de France (AGF), SEITA, Thomson SA, Renault, Union des Assurances de Paris (UAP) and Pechiney. Most of these companies became part of the public sector as a result of the nationalization measures implemented after the Second World War. In addition, in 1982 the Socialist government decided to increase the number of state-owned firms and nationalized five of the most important industrial groups (Compagnie Generale d'Electricite, Saint-Gobain, Rhone-Poulenc, Pechiney and Thomson SA) as well as the 39 largest French banks. These nationalizations cost the state over 60 billion French francs (FF) (approximately US$9 billion).(*) Between 1993 and the first half of 1995, BNP, Elf-Aquitaine, Bull, Rhone-Poulenc, SEITA, UAP and Usinor-Sacilor were all privatized.

In connection with the economic policy of reducing public expenditures, the French government decided to accelerate the privatization program in July 1995, since it expected revenues from the program in an amount equal to approximately FF40 billion for that year. In this respect, a decision was made pursuant to a decree dated 17 July 1995, to proceed with the transfer to the private sector of the French state's shareholdings in Pechiney, Compagnie Generale Maritime and Renault.

Background on Pechiney

Anticipating its privatization, the Pechiney group decided at the beginning of 1995 to restructure its activities. The group's core businesses were the production and sale of primary aluminum and aluminum products (25 percent of its turnover for 1994) and the production of packaging materials. The total amount of Pechiney's turnover equaled FF70 billion for 1994. At that time, Pechiney was also the third-largest worldwide aluminum producer and the second largest in Europe.

As part of its strategy of focusing on core aluminum and packaging activities, the Pechiney group launched a major divestiture program aimed at disposing of certain non-strategic businesses and improving the financial structure of the group through debt reduction. Through this divestiture program in 1995, the group sold assets valued at approximately FF10 billion. Assets sold included shareholdings in the components and system division (Carbone Lorraine), the group's North American glass activities (Foster Forbes), the group's North American food metal and specialty activities and the group's turbine components division (Howmet).

Given the extent of its divestiture program, the consequent debt reduction and the increase in operating results for the first half of 1995 (as a result of the high market price for aluminum at that time), Pechiney appeared by October 1995 to be in a good position to be effectively privatized.

When the privatization process was launched in November 1995, the French state held 55.8 percent of the share capital and 80.4 percent of the voting rights of Pechiney. AGF, a public sector company at the time of the Pechiney privatization, which itself was recently privatized in May 1996, and BNP, a company privatized in 1993, owned respectively 8.8 percent and 7.6 percent of the share capital and voting rights. In addition, 3.2 percent of the share capital and voting rights of Pechiney were owned by financial institutions including the Caisse des Depots et Consignations. The remaining percentage of the share capital (24.6 percent) was held by the public in the form of non-voting securities with dividend priority rights called certificate d'investissement privilegies (CIPs); the corresponding voting rights evidenced by certificates had been granted to the French state at the time of the issuance of the CIPs. The purpose of the issuance of such nonvoting securities, listed on the Paris Bourse, was to finance the development of Pechiney's activities on the capital markets. The issuance of common shares granting voting rights was prohibited at this time since it would have been considered the equivalent of a partial privatization of Pechiney. Furthermore, in order to finance other investments, Pechiney created Pechiney International in 1989. Its common shares were listed on the Paris Bourse, with Pechiney holding 67 percent of the capital.

This article highlights the principal rules of the French privatization process with particular emphasis on issues related to the Pechiney case.

The Privatization Procedures Chosen by the French Government

Absence of a Group of Stable Shareholders

Most previous privatization processes in France have been conducted pursuant to capital market procedures and off-market private sales. Such off-market private sales were implemented in order to create a group of stable shareholders selected by the French government after consultation with the Commission on...