Protectionists heed the parable of Pechiney

If anyone wants to understand why continental Europeans – in particular the French and the Germans – are so suspicious of foreign takeovers, they need look no further than the drama that is being played out at Rio Tinto.

This mining giant is fighting off a $153bn hostile bid from Australia’s BHP Billiton and its defence has the French politicians up in arms. Whatever the rights or wrongs of BHP’s hostile bid, Rio Tinto’s defences have reopened deep wounds in France.

Now why should this battle between global mining heavyweights worry the French? The fact is that Rio Tinto only recently acquired Canada’s Alcan for $38bn. The ordinary Parisian might again ask, so what? But Alcan was also the Canadian aluminium company that launched a successful hostile bid for France’s Pechiney back in 2003.

In spite of widespread concern in France that a Canadian interloper was snapping up one of the prides of French industry, the Paris government unusually decided to take a hands-off approach. Alcan was allowed to acquire for €4bn ($5.9bn) the French company – then the world’s fourth-largest aluminium group. Recognising the sensitivities of such a deal in France, the Canadians pledged to safeguard French jobs and plants and place the headquarters of their European operations in Paris.

But this pledge fell victim to the obvious pressure of the world market and within two years it was already clear that Pechiney was only a shadow of its former self in France. This summer, Alcan – itself under attack from US aluminium rival Alcoa – agreed to merge with Rio Tinto. Yet again there were French casualties as the new combination decided to spin off its packaging business. But Rio Tinto also sought to reassure the French government by saying it would maintain a French presence, especially in research and development.

Now itself under hostile attack, Rio Tinto has decided that one of the ways to defend itself from BHP is to sell or spin off far more of its non-core businesses that it originally planned under the Alcan deal. This now includes Alcan’s fabricated aluminium activities and a large part of the remaining Pechiney heritage. In all, some 10,000 jobs are at risk in France so it is hardly surprising that many politicians feel that the country’s single high-profile attempt at a genuine laisser faire approach to takeover has been a disaster.

Since then, economic patriotism has become the rule. President Nicolas Sarkozy has repeatedly made it clear that he will not see French industry sacrificed on the high altar of the free market. After all, for the French political establishment it was the free market that buried the 150-year-old Pechiney group.

The same can be said for Germany, which, in spite of its free market instincts, cannot forget the bitter experience of Vodafone’s successful hostile bid for Mannesmann. Since the takeover – a deal that still ranks as the biggest cross-border hostile takeover ever mounted, even bigger that BHP’s bid for Rio Tinto – Mannesmann has all but disappeared from the German corporate landscape with many of its component parts broken up and sold to other groups. There is still today considerable sadness in Germany over the outcome of the Mannesmann saga. In turn, it has prompted the country to sharpen its defences against foreigners making hostile approaches. Indeed, the Berlin government seems to be leaving nothing to chance. It is now legislating against the new threat from activist “locusts” and the even more worrying investment appetites of so-called sovereign wealth funds.

Bright lights

The declining dollar has some of Europe’s leading exporters such as Airbus coming out in spots. Surprisingly, however, few euro-based hard-currency companies have so far seized the current weak dollar opportunity to pick up US assets on the cheap, relatively speaking.

Not so Philips. The Dutch consumer goods and electronics group seems to have picked the perfect moment to spend some of the €20bn ($29.7bn) war chest it has accumulated for acquisitions, dividends and share buy-backs over the next three years on an early Christmas shopping spree in the US. Its $2.7bn agreed bid for Genlyte, the US lighting fixture maker, is not only the largest purchase the Dutch group has made in the past five years, but will now help it overtake General Electric in the North American lighting market.

The acquisition looks all the smarter given the current appetite for energy-saving lighting at a time when oil prices are hovering around the $100-a-barrel mark. Philips has been using cash from the sale of its semiconductor division to strengthen its three core businesses – medical, consumer electronics and lighting where the emphasis has been on developing energy saving products.

Philips plans to use Genlyte to spearhead the launch of its energy-savings product in the US market. As its new US purchase sells 90 per cent of its lighting fixtures to office buildings, shops, streets, factories and petrol stations, it is hardly affected by the US housing downturn. Another reason they are probably feeling pretty smug in Amsterdam.

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