FT, January 10 2008 19:59: The new year has hardly begun and already the first salvoes over the future of the world’s biggest nuclear group, Areva, have been fired.
Last week it emerged that Areva had held preliminary talks with French construction group Vinci about a partnership to build nuclear power stations in the UK and elsewhere.
On the face of it, nothing could be more logical. As a company that provides nuclear services from reactors to fuel supply, recycling and waste treatment, Areva is seeking the expertise it lacks in big infrastructure projects as the nuclear sector takes off.
But look deeper, and nothing is quite that simple in the highly political tug of war over the future of France’s most promising industrial flagship. For the shrewdest observers, the discussions are the latest tactic by Anne Lauvergeon, Areva’s formidable chief executive, to stymie any attempt to combine the state-owned company with Bouygues – Vinci’s rival – and its 30 per cent subsidiary, turbine maker, Alstom.
France’s President Nicolas Sarkozy is considering this option as he reviews how best to use France’s nuclear advantage to restore his country’s influence on the world stage and revive a flagging industrial base and its exports.
Mr Sarkozy has been tempted by the idea of creating a broader energy champion through the merger of Areva’s reactor business with Alstom’s turbines – which are today largely used in the traditional fossil fuel plants that will continue to dominate the power landscape for many years.
Bringing the two together would create a group with higher power sales than rivals such as General Electric or Siemens, while Alstom’s presence in 70 countries could help bring French nuclear business to new markets. Bouygues’ project management expertise is an extra attraction, given Areva’s disastrous experience in Finland where its new generation EPR reactor is suffering delays and cost overruns.
Patrick Kron, Alstom chief executive, firmly believes a deal is in everyone’s interests. “Nuclear is certainly going to develop in nuclear countries. But it will also develop in countries with no nuclear experience. And we know these countries because we have helped to develop 25 per cent of the installed capacity around the world. If nuclear is limited to France, the US and UK then Areva is OK on its own. But if they have to go out around the world, we are better off together.”
But the government is not yet ready to agree. Alain Bugat, head of the Atomic Energy Commission that holds 79 per cent of Areva for the government, believes a broader energy group is attractive. But he accepts that Alstom, with only a small percentage of its sales in the nuclear domain, “does not bring a lot to Areva”.
Moreover, any merger faces its biggest hurdle in the deeply rooted hostility between Ms Lauvergeon and Mr Kron, which arose from the Alstom chief’s attempts to force a merger in 2003.
“The question of people is crucial,” says one Alstom insider. “The two sides need to feel there is an upside, and Areva’s chief executive believes that dealing with us could pose a problem for her.” Since September, Areva has been preparing a five-year investment plan that will cast further doubt on merger benefits, says one Areva director. The commitments will be sizeable – estimated at €12bn-€15bn ($17bn-$22bn) – with not only a global nuclear revival to be addressed, but also the cost of renewing France’s 58 nuclear reactors.
“The big question is how does a merger allow me to finance these investments?” the director says. “If Bouygues wants to keep its stake in Alstom-Areva at a significant level, then it will have to invest a lot. It is not the cash flow from Alstom that will finance what Areva needs in the next five years.” The best option for many at Areva is a simple listing, with the government keeping a golden share in areas such as fuel supply and recycling, defence and waste treatment.
“The need is for €2bn-€5bn and we could do €2bn in a first round and €3bn later. The question of who will be the shareholder is not essential. We need the capacity to innovate, recruit and invest,” the director says.
Ms Lauvergeon’s response to the government’s review has been to demonstrate that Areva can achieve its aims through industrial partnerships such as that being discussed with Vinci. Alstom too could be a partner when customers want to buy a complete nuclear package, turbine included.
Areva has tapped Mitsubishi of Japan as a partner for Asia along with Bechtel for the US. Siemens is its long-time European partner with a 34 per cent stake in Areva’s reactor business.
The strategy has the benefit of avoiding difficult questions such as what would happen to Siemens should Alstom come on board. The two are arch-enemies after Siemens attempted to block Alstom’s state-backed rescue some years ago.
The complexities of resolving Areva’s future mean the government is not expected to rush to a decision before the spring. Even then, it may opt to defer the question of a merger while agreeing to sell a small share of Areva on the market to meet financial needs. After all, an Alstom-Areva merger has now been touted for two decades. Waiting a little longer is unlikely to make much difference.
Copyright The Financial Times Limited 2008