Rio Alcan May Sell AEP-Pechiney to an Alliance of Private Equity and the French State

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M&A Activity, Macroeconomics

One has to wonder what exactly is the French government’s intention in taking a 10% stake in the proposed buyout of Alcan Engineered Products (AEP) aluminum production operations in Europe? Much of AEP is the aluminum plants of the old French producer Pechiney a technically very competent company but with mixed profitability that went through nationalization and privatization in the Ëœ80’s and 90’s before being purchased by Alcan of Canada and then in turn Rio Tinto. Alcan merged Pechiney with various parts of the old Alusuisse organization it also owned in 2001 to form AEP as we know it today.

If it goes ahead France will take a 10% stake in the new venture with Apollo Management the US private equity firm taking 51% and Rio retaining the rest. Pechiney was sold to Alcan in 2003 amid a political storm that such a national “treasure could be sold to foreign interests. Since then France cannot have too much to grumble about in terms of Alcan’s stewardship. Unlike downstream production facilities in other countries, notably the UK, most of Pechiney’s operations are still going strong, employing French workers and generating exports in addition to being a primary supplier to Airbus, TGV and so on. But the French are notorious advocates of “industrial policy, the state’s attempts to pick and support national champions, often at great expense for the tax payer and mixed success in terms of corporate profitability is rivaled only by Japan’s Ministry of International Trade and Industry which was so active in the 80’s and 90’s.

As an article in the Economist observed, there is a renewed trend of industrial intervention by governments in rich countries. America has pumped billions into banks and car-makers, and President Obama’s stimulus plan has earmarked billions more for innovation in such sectors as renewable energy, high speed rail and advanced vehicles.   The previous Labour government in the UK set up a $1.2bn Strategic Investment Fund to steer state aid into particular industries and companies it considered worthy but the new Conservative led coalition has dumped many of the projects, including one that may have proved a good idea loan guarantees for Sheffield Forgemasters to invest in a heavy forging plant to break into the nuclear industry against Japanese competition; a project we wrote about earlier this year.

So just what does constitute an effective framework for state investments? Well helpfully the Economist shares i’s ideas as follows:

First, the more the investment or support is in step with a national or local economy’s comparative advantage, the more likely industrial policy is to succeed. Drives to spur high-tech entrepreneurship in areas of heavy manufacturing, for instance, face a struggle. Which raises the question how much should western governments pour funds and protection into industries like textiles or coal mining, industries against which the tide of history for decades has been flowing the other way?

Second, policy is least prone to failure when it follows rather than tries to lead the market. This comes back to the Sheffield Forgemasters situation. Westinghouse, an American company, had suggested to the Yorkshire firm that it should try to break Japan’s monopoly on ultra-large nuclear steel forgings and was willing to work with them by pre-paying tens of millions of dollars to support the endeavor when your largest customer, in a growth market, is behind you like that your business case looks strong.

Third, industrial policy works best when a government is dealing with areas where it has natural interest and competence, such as military technology or energy supply. Arguably US support for Boeing through space and defense projects and European governments support for Airbus via a variety of soft loans and other support are cases in point. The worst problems unfold when politicians intervene in purely private domains with short-term goals, bailing out old firms to save jobs or spending lavishly on white elephants. Interestingly the UK’s new Business Secretary, Dr. Vince Cable may have had exactly this in mind when he recently visited the Corus steel works mothballed by Tata earlier this year. By avoiding making a big show of support with the unions he may well have been distancing himself from calls for state aid to keep what is probably an uneconomic steel plant going.

So back to France’s FSI strategic investment fund’s 10% stake in the proposed Apollo buy out of AEP. They are almost certainly positioning themselves on the board to prevent plant closures, job losses and to steer state support in whatever way proves necessary to keep AEP/Pechiney more or less in its current form and location. Whether it will prove money well spent remains to be seen but Industrial Policy appears alive and strong in France at least.

–Stuart Burns

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