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

UNCLAS SECTION 01 OF 02 PARIS 008548 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR PM, EB, EUR/ERA AND EUR/WE 
 
E.O. 12958: N/A 
TAGS: EIND MARR MASS PARM ECON FR
SUBJECT:  FRENCH NAVAL COURTSHIP CREATES DEFENSE INDUSTRIAL 
CHAMPION 
 
 
¶1. (SBU) Summary:  The GOF, Thales, and state-owned 
shipbuilder DCN, have confirmed that the French defense 
electronics group has agreed to buy a 25% stake in DCN. 
Their messages echoed the widespread expectation that the 
Thales-DCN tie-in would be applauded by its architects as a 
first step toward wider European defense consolidation.  The 
GOF emphasized (wishfully) that next steps could bring 
Spanish and (later) German shipbuilders into the fold. 
However, practical business concerns -- not grandiose ideas 
of building a "naval Airbus" -- more likely convinced Thales 
to agree to the deal.  Thales' decision to take a stake in 
DCN appears to have been motivated primarily by DCN's cost- 
cutting and management reforms as well as a steady near-term 
workload in the company's shipyards.  End summary. 
 
¶2. (U) On December 15, Defense Minister Michele Alliot-Marie 
and Finance Minister Thierry Breton took the lead in 
announcing the deal to tie-in French naval construction 
company DCN with combat systems company Thales, as had been 
first reported on December 9 (see Paris Points).  The 
announcement included details of the modalities of the deal, 
which Alliot-Marie and Breton spelled out alongside Thales 
President Denis Ranque and DCN President Jean-Marie 
Poimboeuf.  The key elements of the deal are that Thales 
will initially acquire 25 percent of DCN as well as two of 
the six shareholders' committee seats.  Thales will also get 
the right to veto strategic decisions, such as acquisitions 
or key partnerships.  The deal values DCN at 2.8 billion 
Euros, based on 1.5 billion Euros in cash and 1.3 billion 
Euros of company value.  The Armaris 50/50 joint venture as 
well as the MOA2 partnership for aircraft carrier 
construction (the French Navy has yet to sign a contract) 
will both be fully ceded to DCN, but Thales will continue to 
play an important role as a DCN shareholder. 
 
¶3. (U) The tie-in of these two French defense industry 
leaders was designed to address the fragmentation of 
Europe's naval shipbuilding sector.  Defense Minister Alliot- 
Marie had reportedly been particularly active, playing a 
central role in brokering the deal by acting as matchmaker 
for the two companies over the past three years.  Alliot- 
Marie summed up her motivation in saying that linking the 
two companies would secure the French military shipbuilding 
sector for the long-term and put an end to "Franco-French 
competition that could only weaken us."  Alliot-Marie's 
comments implied that she and others will focus their post- 
announcement energies on drawing other (non-French) European 
companies into the fold.  The parties to the deal emphasized 
expected synergies from pooling of research and development 
efforts.  Thales hopes to bring financial and industrial 
modernization to DCN by among other things improving 
efficiencies by reducing the number of suppliers, reducing 
costs paid to suppliers, creation of logistical platforms 
with just in time delivery, and increasing emphasis on 
periodically renegotiable maintenance contracts with the 
French Navy.  Thales said that it would encourage an 
"acceleration of (DCN's) managerial evolution toward a 
company which is increasingly open and increasingly 
entrepreneurial." 
 
¶4. (U) To formally seal the deal, Ranque, Poimboeuf, Alliot- 
Marie, and Breton signed a declaration of intent midday on 
December 15 with industry-watchers predicting that it would 
take up to six months to fully gel.  Thales will handover 
assets, including its French naval subsidiary, and 100 to 
150 million Euros in cash after a period of due diligence. 
Thales also gets the option of increasing its stake to 35 
percent after two years.  Breton took a familiar tone 
emphasizing that "The State will remain very much the 
majority shareholder" -- a statement that echoed similar 
assurances with respect to Gaz de France and Electricite de 
France as well as assurances given by his predecessors in 
the early stages of privatization of France Telecom.  Thales 
President Ranque characterized the deal as a "marriage ... 
of a modern couple .... If their engagement was long, they 
nonetheless managed to have a few children (presumably 
Armaris and MOPA2) in the interim." 
 
¶5. (SBU) Several reports compared the still fragmented 
European naval construction sector with its U.S. 
counterpart.  As with other defense industry sub-sectors, 
U.S. naval shipbuilders are strong and well-consolidated, 
with just four main players and a combined annual turnover 
of 11.6 billion Euros.  By contrast, Europe has 11 companies 
and only 9.1 billion Euros in combined turnover.  This 
fragmentation and significant overcapacity of European naval 
construction is in marked contrast with the European 
military aerospace sector, which is concentrated around the 
UK's BAE Systems and Airbus parent EADS.  Hence, this drive 
for consolidation has led many to nickname the strategy 
"naval Airbus." 
 
¶6. (SBU) Where is the French hunt for a non-French European 
partner leading?  Industry analysts say that talks with 
Spanish company Navantia have progressed the furthest, but 
still have a long way to go.  Similarly, many pointed to 
German shipbuilders TKMS (ThyssenKrupp Marine Systems) or 
the Atlas Group as the most likely partners.  TKMS is 25% 
owned by U.S. firm OEP, a subsidiary of JP Morgan.  There 
have been many reports that Thales has been trying to buy 
into the Atlas Group, but that their efforts have been 
resisted by German officials.  The TKMS steel and 
engineering group recently added German submarine maker 
Howaldtswerke-Deutsche Werft AG to its marine division, 
along with Swedish Kockums AB and Greek Hellenic Shipyards 
SA.  A major Franco-German deal is seen as a logical move 
toward the creation of a European naval equivalent of EADS. 
Alliot-Marie summed it up by saying that "We will have to 
get consolidation in Europe.  I don't think it will start 
with the Germans.  There are more advanced conditions for it 
with the Spanish and the Portuguese."  Comment:  This is 
mainly wishful rhetoric, since nationalism or, in French 
terms, "economic patriotism" would keep these potential 
partners from being consolidated into a French-led European 
champion.  Last resort consolidation remains possible if and 
when any of these European companies run out of shipbuilding 
contracts and face an economic abyss as their only clear 
alternative.  End comment. 
 
¶7. (U) As with any major industrial deal in France, concerns 
of unions play a role, which cannot be overlooked.  Indeed, 
workers resisted efforts to pacify their concerns by calling 
for strikes on the day of the announcement to protest what 
they see as creeping privatization.  The call for strikes 
turned out to be little-heeded, with only three of eight 
sites affected.  Only 250 employees out of 2,800 in Brest 
joined the protest.  Thales CGT union leader Bernard Carlier 
commented: "What doesn't reassure us is that our main 
shareholder, the French state, does not explain how it will 
include Thales in reshaping the European defense industry. 
(The GOF) is acting more as a customer than a shareholder." 
The GOF maintains a 31.3% stake in Thales.  Alliot-Marie 
took her turn trying to reassure the unions by saying that 
"DCN is not privatized, the (civil service) status of the 
employees is confirmed and no side is threatened."  DCN has 
some 12,000 employees and Thales is much larger with broader 
interests across the defense sector. 
 
¶8. (SBU) Comment:  Years in the making, the deal is the 
result of GOF marketing of "private" company DCN.  Although 
the GOF remained the only shareholder until this deal was 
announced, it had transformed the state entity into a 
company structure several years ago, diminishing the state's 
direct role in DCN.  In the interim and motivated by the 
need to attract other shareholders, DCN cut its expenses and 
its workforce.  Payroll and pension costs were reportedly 
constrained by not giving civil service status or pensions 
to new hires.  At Euronaval in November 2004, when rumors of 
a Thales buy-in were rife, the GOF announced that DCN would 
be opened to other investors.  More than a year later, they 
finally snagged one.  We believe that DCN's persistent 
efforts to constrain costs and modernize management were 
determining factors.  What tipped the balance for Thales 
might have been the fact that DCN shipyards have enough 
actual and potential orders (two Malaysian submarines, 
potential for a second French aircraft carrier, up to 17 
French frigates under the Franco-Italian FREMM program, and 
potential Barricuda orders to build next generation attack 
submarines for the French Navy) to keep them busy for the 
next ten to twelve years.  End comment. 
 
Please visit Paris' Classified Website at: 
http://www.state.sgov.gov/p/eur/paris/index.c fm 
 
Stapleton