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UNCLAS SECTION 01 OF 02 PARIS 004116 
 
SIPDIS 
 
PASS FEDERAL RESERVE 
PASS CEA 
STATE FOR E, EB, EUR AND DRL/IL 
TREASURY FOR DO/IM SOBEL, RHARLOW, LHULL 
TREASURY ALSO FOR DO/IMB AND DO/E WDINKELACKER 
LABOR FOR ILAB - WBRUMFIELD 
USDOC FOR 4212/MAC/EUR/OEURA 
 
E.O. 12958: N/A 
TAGS: EFIN ECPS ECON PGOV FR
SUBJECT: GOF SELLS ADDITIONAL 6.2% STAKE IN FRANCE TELECOM 
TO REDUCE PUBLIC DEBT 
 
Ref: 04 Paris 6529 
 
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SUMMARY 
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¶1.  On June 7, the French government reduced its stake in 
the company by 6.2%, but demand was not sufficient to sell 
an 8% stake to the private sector as initially planned.  The 
decision to sell France Telecom shares was one of the first 
government decisions under new Prime Minister Dominique De 
Villepin.  Privatization proceeds (3.4 billion euros) will 
be used to reduce public debt, which is currently over one 
trillion euros.  The sale appears to be a symbolic gesture 
to show government commitment to public debt reduction and 
continued privatization.  End summary. 
 
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Government Sells a 6.2% Stake in France Telecom 
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¶2.  Exactly two days after a nine-month period during which 
the government stuck to its commitment not to sell France 
Telecom's shares (reftel), Finance Minister and former 
chairman of France Telecom Thierry Breton announced a 
government decision to further reduce its stake in the 
company.  The government planned to sell a minimum 6% stake 
in France Telecom or 152 million shares it held directly and 
indirectly through ERAP, the public establishment that 
manages France Telecom's capital ("capitaux propres"). 
Breton said that the government might sell up to 2% more if 
there was adequate demand for the shares. On June 7, a 
finance minister press communique announced that the 
government sold a 6.2% stake in France Telecom. 
 
¶3.  Shares were sold to institutional investors through an 
accelerated book building process.  The sale was managed by 
Goldman Sachs, the global coordinator and joint book-runner, 
and BNP Paribas, Societe Generale, Deustche Bank and ABN 
Amro/Rothschild.  Quotation of shares was suspended during 
the sale.  Finance Ministry staff close to Breton said that 
the objective was to release stocks from "overhang" risk. 
The price of a share in France Telecom has decreased 7.4% 
since January 1.  France Telecom has a market value of 56.5 
billion euros. 
 
¶4.  The government has reduced its stake in France Telecom 
to 34.9% (above the minimum 33% to retain a blocking 
minority) from 41.1%.  Since September 2004, the Government 
stake has decreased from 42.25% (reftel) to 41.1% due to the 
share sales to France Telecom's employees in January 2005. 
Breton confirmed that the government "plans to remain a 
major shareholder over the medium-term." 
 
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Privatization Proceeds Will Again Be Used to Reduce Public 
Debt 
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¶5.   The sale netted the government 3.4 billion euros, below 
the 3.5-4.0 billion euro government target, which had taken 
into account pricing related to this type of sale.  The sale 
has driven share prices close to 22.37 euros, below the 
French government's target of 22.50-22.85 euros, but well 
above the 19.05 euro share price earned at the last GOF sale 
of France Telecom stock (reftel).  Francois Travaille at 
Dexia Securities declared: "there is a lack of visibility 
regarding the three-year company strategy to reduce costs 
and debt; the price was expensive; the environment of the 
sector is still weak; and we are seeing many profit 
warnings.  People think the sale was politically motivated 
rather than an economic response to events demonstrating 
quick government action." 
 
¶6.  The government will use the proceeds from the partial 
privatization of France Telecom to reduce its public debt of 
64.7% of GDP in 2004 or 1.067 trillion euros.  This decision 
falls under French government efforts to reduce the public 
debt to 62% by 2008.  Yet privatization proceeds cannot be 
used to reduce the general government budget deficit, as EU 
budget rules forbid the use of privatization proceeds for 
this purpose. 
 
¶7.  So far during 2005, the government has sold shares in 
the state-owned toll highway company SANEF (950 billion 
euros) and France Telecom.  Other privatization plans this 
year may include electricity and gas utilities EDF and GDF, 
as well as the nuclear group Areva.  The initial public 
offering of GDF was expected to come to market in September, 
while share offerings for EDF may be postponed from 
October/November until early 2006.  De Villepin promised 
that the partial privatization of Gaz de France (GDF) would 
begin on June 23, with sales of Electricite de France (EDF) 
and several highway companies to follow. 
 
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Unions Protest 
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¶8.  The sale of France Telecom shares was announced late on 
June 4 -- a week after the French rejected the European 
constitution.  The decision sparked an outcry from unions 
about employment and the future of public services.  Much of 
the French public considers telephone, electricity and gas 
to be "public services" whose quality, availability, and 
affordability should be guaranteed to all residents by the 
French state.  Labor union group Force Ouvriere stated: 
"after a slap in face on May 29 with the rejection of the 
European Constitution, we were expecting a government policy 
re-focused on public services; and we get an accelerated 
privatization of France Telecom:  the government has not 
understood anything."  However, unions had already called 
for a day-long strike on June 8 before news that the 
government announced it was selling a new stake in France 
Telecom. 
 
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Comment 
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¶9.  Selling shares of France Telecom was the easiest way for 
Breton to reduce public debt.  Planned partial 
privatizations of GDF and particularly EDF are much more 
controversial among powerful public sector labor unions. 
Nevertheless, the overall impact on the public debt is 
minuscule, as the debt remains around one trillion euros 
after proceeds of the sale.  Some might say that the France 
Telecom sale is merely a symbolic move showing that the new 
government continues its pursuit of privatization. 
WOLFF