Anger as US bids to shut out foreign ‘predators’

Date: 07/09/00

THE summer saga over Deutsche Telekom's attempted take-over of US mobile-phone operator VoiceStream threatened to rewrite the global competition policy rulebook on the hoof.

If successful, new US legislation would do more to stem the €160-billion annual wave of acquisitive cash flowing into the American markets and do more than any row over farm products or aircraft-engine mufflers to hobble the trading relationship between Brussels and Washington.

US legislators have long resented what they see as backdoor nationalisation of any private companies - Congressional eyebrows were raised when Deutsche Post bought Air Express International and the acquisitive Electricité de France has not even tried its luck there - but Telekom's latest move has tipped the scales in election year.

Worried that the German state continues to hold a 58% stake in Telekom, Ernest Hollings, the leading Democrat on the Senate commerce committee, introduced a draft law preventing any take-over of a US telecoms operator by a firm more than 25%-owned by a foreign government.

The legislation won powerful backing from Senate Republican leader Trent Lott and his Democrat counterpart Tom Daschle, while John Dingell, Hollings' equivalent on the House of Representatives commerce committee, introduced an identical bill.

The Clinton administration knew such a law would violate commitments signed under the 1997 telecoms agreement brokered by the World Trade Organisation, but declined to take on a bipartisan

Congress in the run-up to the presidential elections in November.

The EU obviously had no such qualms. The European Commission wrote to US Trade Representative Charlene Barshefsky warning her that the bill would violate WTO commitments and its passage would oblige the Union to suspend its own pledges.

German Economics State Secretary Axel Gerlach also wrote to Deputy US Treasury Secretary Stuart Eizenstat condemning the move and claiming that his country had now established "a very liberal telecommunications market that features no restrictions on foreign ownership".

The US move threatens to derail a growing trend for German firms to buy abroad. M&A International estimates that German businesses made 231 acquisitions abroad in the year to June while foreign firms made only 168 purchases of German stakes.

Telekom wants to buy heavily abroad to fulfil its strategy of becoming a player in every major geographical and technological marketplace. The company needs an infrastructural 'backbone' for data-transmission and Internet access and a boosted presence in the French, Italian and Spanish mobile markets.In purely practical terms, Telekom's bid for VoiceStream was a strange fight to pick. The company is highly independent operationally; so much so that an activist 58% shareholder might well balk at the high €53-billion price Telekom is paying for VoiceStream. There is no question - as there has been in Deutsche Post's or EDF's case - that the company is benefiting from privileged access to the capital markets or cross-subsidy to fund the acquisition.

Finance Minister Hans Eichel would love to sell the remaining stake and has promised not to retain an interfering 'golden share' of the stock, but he cannot sell under duress since this would inevitably drive down the price.

As the EU makes its threats to the US, it faces one major obstacle: Spain, which already has a far more restrictive law than anything being devised on Capitol Hill.

Indeed, in July, the Commission finally got round to taking Madrid to the European Court of Justice over a five-year-old law which forces the board of a part-privatised company to seek the permission of the government when selling more than 10% of its stock to a firm in which the state owns more than 25% of the shares. At first glance, the law blatantly violates Articles 43 and 56 of the EU's consolidated treaties by restricting the freedoms of capital movements and establishment.

Just this year, the law has been used to block Dutch telecoms operator KPN's merger with Telefónica and EDF's purchase of power-generator Hidroelectrica del Cantabrico.

The Spanish government has refused to rule out the possibility that it will seek a change to the treaties to allow enthusiasts of the rigours of privatisation within the Union to prevent cross-border renationalisation.

Madrid could probably count on the support of the Italian government, which stated publicly that it would have prevented Telekom's eventually abortive take-over of Telecom Italia, and the British authorities, which are becoming increasingly frustrated by EDF's snapping-up of UK power suppliers and distributors.

Although proponents of privatisation within the Commission would welcome such a move, even liberals in the trade directorate-general would start to sweat.

The precedent set for the next round of global trade talks would be difficult, to say the least, since victory for the Hollings-Dingell bill combined with an Intergovernmental Conference change in Union law would provide WTO members with another complaint about EU-US restrictions on establishment, at a time when Brussels is trying to revive international rules on investment.

The saga over Deutsche Telekom's attempted take-over of US mobile-phone operator VoiceStream threatened to rewrite the global competition policy rulebook on the hoof. If successful, new US legislation would do more to stem the €160-billion annual wave of acquisitive cash flowing into the American markets and do more than any row over farm products or aircraft-engine mufflers to hobble the trading relationship between Brussels and Washington.