VZCZCXRO1542
RR RUEHAG RUEHDF RUEHIK RUEHLZ
DE RUEHFR #1697/01 0751622
ZNR UUUUU ZZH
R 161622Z MAR 06
FM AMEMBASSY PARIS
TO RUEHC/SECSTATE WASHDC 5278
INFO RUCPDOC/USDOC WASHDC
RHEBAAA/USDOE WASHDC
RUCNMEM/EU MEMBER STATES

UNCLAS SECTION 01 OF 03 PARIS 001697 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR EUR/WE; EB/ESC, AND EB/CBA 
USDOC FOR 4212/MAC/EUR/OEURA 
DOE FOR ROBERT PRICE PI-32 AND KP LAU NE-80 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ENRG EIND EINV ELAB PREL PGOV FR
SUBJECT: Criticism Persists at Home and Abroad over French 
GDF-Suez Merger 
 
REF:  (A) Paris 1312 
 
(B) Paris 755 
(C) Paris 357 
 
¶1. (SBU) Summary:  Criticism of the proposed merger of Gaz 
de France (GDF) with water and power utility Suez continues 
both at home and abroad.  Domestically, unions and the left 
protest proposed GDF privatization.  Abroad, Brussels, Italy 
and other EU member states denounce French "economic 
patriotism" as a threat to European integration and energy 
sector consolidation.  Because this merger announcement came 
only days after Italian power company Enel publicly revealed 
its interest in bidding on Suez, Italian protests have been 
the harshest.  The French and Italian governments most 
recently vowed to let the companies work it out without 
(further) political interference.  We expect the GDF-Suez 
deal to proceed, but the European Commission undoubtedly 
will be watching events with interest.  End summary. 
 
¶2. (U) On February 27, with company CEOs by his side, Prime 
Minister Dominique de Villepin announced a planned 70 
billion euro merger of Franco-Belgian water and power group 
Suez with partially-privatized Gaz de France (GDF) to create 
Europe's largest utility.  The combined group would enjoy an 
unrivalled portfolio in terms of gas supply options, with a 
15% European market share in natural gas and strong presence 
in the expanding sub-sector of liquefied natural gas.  In 
the electricity sector, adding Suez's power plants to GDF's 
gas customers should provide credible competition for 
Elecricite de France (EDF). 
 
¶3. (U) Under different circumstances, neutral observers 
might consider this a sensible business tie-up.  GDF alone 
is viewed as too small, with annual sales of 18 billion 
euros earned largely within France and virtually no presence 
in the electricity sector.  A merger with Suez would push 
GDF into the power market and beyond French borders, thus 
helping it to survive and even possibly thrive in Europe's 
liberalizing energy markets. 
 
¶4. (SBU) Villepin asserted that his support for the GDF-Suez 
merger was motivated by this "industrial logic" as well as 
the "strategic importance of energy for France."  However, 
many attribute the motivation to Enel's interest in 
acquiring Suez, which the Italian power company made public 
on February 22.  GOF officials have consistently insisted to 
us that GDF and Suez had been talking for months, whereas 
the threatened hostile take-over bid from Enel came as a 
surprise, which only accelerated the GDF-Suez talks.  In 
response to Italian protests, the European Commission will 
review the proposed merger once GDF and Suez put forward a 
detailed proposal, but our French Industry Ministry contacts 
did not expect this to happen before Italian elections. 
 
¶5. (U) Enel has recently reaffirmed its interest in Suez, 
emphasizing that they are leaving their options open.  Enel 
lost its French partner Veolia -- a water, waste, and 
transport group -- whose chairman recently confirmed that 
they have abandoned a plan to launch a joint bid with Enel 
for Veolia's rival Suez.  Nevertheless, the Italian utility, 
which is 30% owned by the Italian government, has reportedly 
lined up a pool of about eight banks to provide it with 
about 50 billion in financing should it decide to bid for 
Suez. 
 
Domestic Reaction: 
No to privatization, Yes to economic patriotism 
--------------------------------------------- -- 
 
¶6. (U) GOF intervention to bring GDF and Suez together has 
attracted much criticism.  Within France, the criticism has 
focused on the privatization of GDF.  For political reasons, 
the all-share deal is structured as an offer by the smaller 
GDF gas group for Suez.  In order to swap shares, the GOF 
must successfully push forward a change in the 2004 French 
law, which requires the GOF to keep a minimum 70% stake in 
GDF.  The GOF currently holds 80% of GDF.  Under the merger 
deal, the GOF is not expected to go below a 34% blocking 
minority.  However, opposition parties and union leaders, 
already agitating against labor code reforms, strongly 
oppose any further privatization.  Minister Breton is trying 
to assuage union opposition by promising that the GOF will 
ensure that French jobs are preserved as well as GDF 
workers' envied civil service status and benefits. 
 
PARIS 00001697  002 OF 003 
 
 
 
¶7. (U) Predictably, the GOF has responded to the inevitable 
anti-privatization backlash by claiming defense of national 
interests, protecting French water and power company Suez 
from falling under Italian control.  French reaction to this 
"economic patriotism" argument has been favorable. 
According to a recent poll, 69% of people interviewed were 
in favor of GOF intervention to prevent foreign takeovers of 
French companies.  According to those interviewed, 
international mergers bring the impression of globalization 
and job losses in France.  The proposal to conserve Suez 
under French ownership is popular, with 67% of interviewees 
considering it a "good thing."  However, only 32% of those 
interviewed were in favor of the privatization of GDF. 
 
Reactions from other EU member states 
------------------------------------- 
 
¶8. (SBU) European reaction has been largely negative, with 
particularly harsh criticism from Italian government 
officials.  Before the GDF-Suez merger announcement, French 
Finance Minister Breton and PM de Villepin informed their 
Italian counterparts of their opposition to Enel's "hostile" 
bid for Suez.  President Chirac later contacted Prime 
Minister Berlusconi and reasserted the bid's hostility 
adding that there was no French partner who would support 
Enel's bid.  (Comment:  We suspect the GOF may have played a 
role in convincing Veolia to drop the idea of a joint bid 
for Suez with Enel.  End comment.) 
 
¶9. (U) Italy responded that the planned bid was not hostile 
and the GDF merger was a deliberate act of GOF 
protectionism.  Italian Industry Minister Scajola called the 
blockage of the Enel takeover, "an enormous violation of EC 
law."  Italian Economy Minister Tremonti warned that French 
protectionism "must be stopped" or else "we risk an August 
1914 effect."  On March 13, Minister Breton met with his 
Italian counterpart to discuss the deal.  After the meeting, 
Breton said they had agreed to let the companies sort out 
their differences without political interference. 
 
¶10. (SBU) This is not the first troubled deal in the 
French/Italian energy sector.    For almost four years, 
Italy resisted EDF's attempts to increase its stake in 
Edison, Italy's second largest power generator.  Finally, 
last year, the European Commission brokered a deal for EDF 
to buy a 50% stake in Edison. In exchange, Italy was allowed 
to buy a 12.5% share in EDF's planned French nuclear 
facility as well as shares in SNET, France's second-largest 
power generator. The two countries resisted agreeing to a 
deal, until Brussels threatened to force governments to sell 
company shares to open their markets, according to a 
European Commission official. 
 
¶11. (SBU) The merger of GDF and Suez will also have to 
address concerns of energy market regulators and competition 
authorities.  Already, the Belgian regulator reportedly 
recommended that GDF sell its 25% stake in SPE, which is 
Belgium's only other power producer apart from Suez's 
Electrabel.  Suez also owns portions of Belgium's 
electricity grid operator Elia, Belgium's gas pipeline 
network Fluxys, and Distrigas, a gas distributor which holds 
roughly 80% of the Belgian market.  "The French government 
would have a say in our transportation structure, which in 
our view in terms of security might cause problems," Belgian 
Commission of Regulation of Electricity and Gas spokesman 
said.  The Belgian regulator also expressed concerns about 
security of nuclear energy supplies, recommending that 
Electrabel sell some of its nuclear assets.  In Belgium at 
least, French economic patriotism may be getting a taste of 
its own medicine. 
 
GOF response:  We're more open than most 
---------------------------------------- 
 
¶12. (SBU) In response to accusations of protectionism, 
French officials have highlighted France's relative 
openness, citing statistics on foreign direct investment. 
Chirac's recent comments in Berlin were illustrative of this 
line.  He pointed to the fact that France receives twice as 
much foreign direct investment as Germany, for example. 
Chirac claimed that "France is one of the most economically 
liberal states in Europe."  The French, unlike the Germans, 
have privatized water utilities and highways, and the French 
 
PARIS 00001697  003.2 OF 003 
 
 
lead Europe in mergers and acquisitions, he further argued. 
The MFA DAS-equivalent for energy matters, Nicole Taillefer, 
had earlier made these same points to us, emphasizing that 
France is more open to investment than other European 
countries, particularly Germany.  She claimed that French 
investment in Italy is roughly equal to Italian investment 
in France, noting Enel's stake in planned nuclear reactor in 
Normandy. 
 
Comment 
------- 
¶13. (SBU) After the Russia-Ukraine gas dispute and steady 
increases in oil and gas prices, the GOF seems to be staking 
out energy as a national security issue and therefore a 
prominent part of its economic patriotism policy.  However, 
GOF actions may lead to a fragmented (along national 
borders) energy sector rather than to greater EU-wide energy 
security.  Meanwhile, GOF tactics in defending the GDF-Suez 
merger have been contradictory, stressing economic 
patriotism and vowing to protect jobs at home, while 
defending the general openness of the French economy abroad. 
Perhaps this is why criticism has persisted.  The GOF's own 
mixed messages are being used against them. 
 
¶14. (SBU) Minister Breton's recent agreement with his 
Italian counterpart to let the companies work it out without 
political inference indicates that the GOF is confident that 
Suez will continue to support its merger with GDF, even if 
Enel's rumored cash offer materializes.  If the two 
governments, Suez, GDF, and Enel cannot work it out for 
themselves, the European Commission may be tempted to weigh 
in to broker a deal similar to the Endesa/EDF compromise. 
End comment. 
 
 
Please visit Paris' classified website at: 
http://www.state.sgov.gov/p/eur/paris/index.c fm 
 
Stapleton