Monti struggles to stop governments meddling in former monopolies

Date: 25/05/2000

By Bruce Barnard

THE Madrid government's hijack of a planned 67-billion-euro merger between Spain's privatised telecoms giant Telefónica and Dutch national operator KPN has refuelled fears that other EU capitals will try to smother market-driven cross-border deals between former state-owned companies.

Concern that Spain's recently re-elected centre-right government will pursue an interventionist policy, reversing a widely applauded pro-market stance in its first term in office, has been compounded by its decision to block a take-over by German utility Energie Baden Württemburg (EBW) of a Spanish power company in favour of a domestic offer.

Madrid has blown a hole in Competition Commissioner Mario Monti's campaign to stop governments from influencing business decisions of former monopolies with the use of 'golden shares' and special rules governing privatised companies.

The Commission's threat of legal action against Madrid over the Telefónica and EBW cases is unlikely to stop governments from meddling in the affairs of former state-owned companies. It has already put France in the dock over its golden share in oil company Elf Aquitaine and the UK for its veto rights over the privatised British Airports Authority. It is also taking action against Belgium, Portugal and Italy.

Monti's campaign was boosted this week when the European Court of Justice condemned Italy's golden shares in former monopolies ENI and Telecom Italia in a ruling likely to set a precedent for similar outstanding cases.

But even as the Commission warned Spain that it was acting illegally, Economy Minister Rodrigo Rato made it clear his government would block any take-over bid for Telefónica by France Télécom or Deutsche Telekom.

However, while EU governments are loathe to loosen their grip on former monopolies, especially telecoms firms which are one of the locomotives of the 'new' economy, their ability to rig the market is limited.

The increased incidents of government meddling largely reflect the spectacular rise in merger and acquisition activity spurred by the launch of the euro and galloping globalisation. The value of European deals totalled €455.4 billion in the first quarter of this year, the second highest on record after the previous quarter's €580.8 billion, according to investment bank JP Morgan.

Both Telefónica and KPN bounced back hours after Madrid scuppered their planned alliance, which would have created Europe's fourth largest telecoms company, with a pair of mold-breaking deals. Telefónica's chairman Juan Villalonga announced that the firm's mobile unit Terra Networks had paid €13.75 billion for the Internet search engine Lycos in the first European acquisition of a top American dotcom company and KPN sold 15%of its mobile offshoot to NTTDoCoMo in a 5-billion-euro deal which represented one of the biggest single overseas investments by a Japanese firm.

But European executives fear politicians still present a potent threat to cross-border deals in the pipeline, especially in the telecoms and financial services sectors.

In a spate of cases over the past year, decisions appear to have been taken purely on nationalistic grounds, such as the Italian government's blocking of a defensive merger between Telecom Italia and white knight Deutsche Telekom in favour of a bid by a domestic predator, Olivetti. Portugal tried, unsuccessfully, to stop Spain's top bank Banco Santander Central Hispano from acquiring a strategic stake in the country's third largest financial institution Mundial Confianca, and Belgium balked at a bid by the all Dutch ABN-Amro for Générale de Banque but cheered a rival offer by the Belgian-Dutch Fortis.

France has finessed intervention into a fine art, by blocking, promoting, hindering or engineering mergers, both friendly and hostile, by both domestic and foreign predators. Last year, it killed off Banque Nationale de Paris' radical €34.5-billion double-barrelled bid for domestic rivals Societé Générale and Paribas, and "advised" Deutsche Bank and other foreign banks not to even think about entering the fray.

Earlier this year, the French warned the Dutch financial services giant ING off a friendly bid for Crédit Commercial de France (CCF), in which it held a 19% stake, but welcomed a rival take-over by London-based HSBC. Paris was fairly relaxed about the deal as CCF was only the eighth-largest French retail bank and was already majority-owned by other European financial services groups.

Paris' bottom line is that current and former monopolies must not fall under foreign control, while mergers between French companies which create global groups must be encouraged. Sometimes it has brokered merger deals that were on the verge of collapse like Aventis, the life-sciences group created by Germany's Hoechst and France's Rhône-Poulenc. The new company has its headquarters in Strasbourg, but it has a two-tier German-style board.

Madrid sought to portray its intervention in the Telefónica and EBW cases as strikes against government influence in business. Its official complaint against the telecoms merger was the Dutch state's 43.5%-stake in KPN, which would have given a foreign government a say in a Spanish company which is still providing a public service.

Foreign firms seeking mergers with Spanish firms must be privatised, Economy Minister Rato insists, ruling out bids by 63% state-owned France Télécom and 65% state-owned Deutsche Telekom for Telefónica. Rato's remarks also cast doubt over planned merger talks between the Spanish-Argentine oil and gas group Repsol-YPF and the Italian energy group Eni, which is 36% government owned.

Energie Baden Württemburg was barred from bidding for Spanish power company Hidroelectrica del Cantabrico, even though its offer was significantly better than a rival bid from local utility Union Fenosa, because France's state-owned Electricité de France (EdF) holds a 25% stake in the German company.

Madrid is not fazed by foreign involvement in its power sector - the US utility TXU is a leading shareholder in Hidroelectrica del Cantabrico - but it draws the line at EdF, which it accuses of levying high transmission fees to block cheap electricity imports to Spain. Its frustration is shared by fellow EU governments such as the UK, which is irked that EdF has acquired local electricity utilities while its home market remains out of bounds to outsiders.

Government control over key industrial sectors, especially in the Union's southern member states, is waning and is more than compensated for by the unexpectedly swift retreat from intervention by Germany's ruling Social Democrats.

Berlin is simultaneously promoting the privatisation of monopolies such as Deutsche Post and Deutsche Telekom set in motion by the previous administration, and giving newcomers leeway to challenge these dying monopolies. Its broadly neutral stance during the hostile take-over bid by VodafoneAirTouch for 'national champion' Mannesman also showed that its conversion to the market is more than skin deep.

This lesson has not been learned in Paris yet. But it will - and sooner rather than later.

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