punkalouver
28th Dec 2006, 02:43
http://www.economist.com/business/displaystory.cfm?story_id=8134768
AS FRENCH stock-exchange regulators investigate share sales by Noël Forgeard, a former co-chief executive of European Aeronautic Defence and Space, questions are being raised about a controversial deal that eventually led to the creation of EADS, the parent company of Airbus. This was a privatisation overseen by a former finance minister, Dominique Strauss-Kahn, who is one of two rivals to Ségolène Royal in the contest next week for the Socialist candidacy in the 2007 French presidential election.
The deal was supposed to provide Airbus with a long-term French private-sector shareholder. Instead it risks driving the now-ailing aircraft-maker back into increased state ownership.
The tale is a sorry one: of a Socialist government selling off a state company—Aérospatiale (a leading partner in Airbus)—at a bargain-basement price to a firm belonging to an influential entrepreneur; of his protégés spending more time fighting each other than attacking Airbus's rival, Boeing; and of the new owner baling out at a vast profit, in part by selling shares back to the government, just before the scale of the mismanagement was made public.
The deal that doomed Airbus has its origins in the late 1990s. Back then a series of American aerospace mergers left the fragmented European aerospace industry looking outgunned. Rationalisation was badly needed. There was growing pressure to convert Airbus into a fully-fledged private company.
Airbus's German partner, DaimlerChrysler, and its British one, BAE Systems, were listed companies. They had no wish to merge their aircraft interests with Aérospatiale. The state-run French company's most valuable asset was its 37.9% share in the Airbus consortium. If the British and German firms were to merge, as they once planned to, France would end up as a junior partner in Airbus, an enterprise which is synonymous with French national pride. So Aérospatiale, which had been the French partner in the Concorde supersonic passenger jet and was the maker of Exocet missiles, had to come under private control.
Enter the Lagardère group, which has diverse businesses from magazines to missiles. It was founded by Jean-Luc Lagardère, who died in 2003. He was an astute entrepreneur who built a business empire with the help of his talent for hiring bright, well-connected civil servants. One of these was Mr Forgeard, a former adviser to Jacques Chirac in his time as prime minister before he became France's president. Mr Forgeard joined Matra, a defence firm, in 1987. Another useful attribute of the group was a media business that included the Europe 1 radio station, France's only Sunday national paper and Paris-Match. This ensured Mr Lagardère was courted by politicians, which put him in a powerful position when the government contemplated how to privatise Aérospatiale.
For the benefit of France
The terms of the deal were hammered out by Mr Lagardère and Mr Strauss-Kahn. Lagardère got 31.5% of Aérospatiale in return for folding into the company its defence-aerospace business, Matra Hautes Technologies (MHT). Lagardère would own one-third of the merged firm and have management control. The understanding was that Lagardère would always be the principal French private shareholder; the idea was to secure the group's future with a strong core shareholder—what the French called a noyau dur. The government would reduce its two-thirds share to 48% by selling 17% of the shares to the public. The terms were generous to Lagardère: Aérospatiale was by any measure (sales, assets, employees) at least three times bigger than MHT, a comparative minnow.
AP An Airbus pair: Noël Forgeard and Arnaud Lagardère
News of the deal emerged in late July 1998, just as the French were packing their suitcases for their holidays. It was completed in June 1999 once all the formalities had been gone through. Part of this process was a review of the deal by court-appointed accountants. Their job was first to ascertain whether the MHT shares were worth at least their value of €618m in Lagardère's books. This they had no trouble doing, and their report is a matter of public record. The trickier task was to justify the one-third share of the much bigger company allotted to Lagardère. Their full report on this aspect is not a matter of public record, but their findings are contained in a document, a copy of which was obtained by The Economist, that Aérospatiale Matra had to file with the French stock exchange before the sale of shares to the public.
The experts clearly found themselves in a difficult position, as they noted. The document talks of “three key limiting factors” in their assessment process which “could affect the exchange value to an extent that it is difficult to put into figures.” One factor was “limited or late access to certain important information”. Another was “uncertainties beyond the normal range of forecasting” and a third was “assumptions underlying the preparation of cash-flow projections”. The basic justification for handing over as much as one-third of the shares to Lagardère was the strategic importance of the transaction for the French aerospace and defence industries and “risks for the Lagardère group”.
One leading Paris analyst, Jean Gatty, put a value on MHT in the range of €750m-1.4 billion. After the first day of dealing in the shares of Aérospatiale Matra, the one-third stake that Lagardère got in return for MHT was worth €2.8 billion. No wonder that at a recent aviation conference in Monte Carlo, attended by the legendary former Airbus boss, Jean Pierson, an Aérospatiale man to the core and whom Mr Forgeard replaced shortly before the deal, Airbus alumni were calling it “the hold-up of the century”. Airbus veterans are bitter at what “the Lagardère boys”, as they are known within the aircraft-maker, have done to the organisation they built up to take on Boeing.
In-flight manoeuvres
Several months after its creation, Aérospatiale Matra announced a merger with the aerospace arm of DaimlerChrysler to form EADS (a Spanish government body owns a 5.5% share and BAE Systems has since sold its Airbus stake back to EADS). Lagardère's right to control the management of Aérospatiale Matra translated into the right to nominate the four French directors of the Franco-German company. The two-headed nature of the firm meant it had to have a French and a German chairman as well as two chief executives, one from each country. This cumbersome structure was bad enough, but longstanding rivalry between Mr Forgeard as chief executive of Airbus and another Lagardère boy, Philippe Camus, his superior as initial French chief executive of EADS, made it progressively dysfunctional. Tensions grew not only between the French and the Germans but also between the parent company and its Airbus subsidiary (which accounted for four-fifths of its profits).
By the time Mr Forgeard had taken the reins at Airbus in 1998, its A320 and A330 models were flying off the shelves. Its new super-jumbo, the A380, was already being developed and the company was beginning to catch up with Boeing. Mr Camus had become the most senior figure in the Lagardère group next to its founder and chairman. On his way up the corporate ladder, Mr Camus used to report to Mr Forgeard, when the latter was running Matra Défense before leaving Lagardère to become boss of Airbus. But the Franco-German merger propelled Mr Camus to the top EADS job, and the tables were turned. Knowing that Mr Camus and his German counterpart had five-year contracts, due to expire in 2005, Mr Forgeard started to manoeuvre to replace Mr Camus. Not only that, he wanted to be the sole chief executive—which antagonised the Germans, always nervous about French attempts to dominate both EADS and Airbus.
Mr Forgeard's main claims to the top job would be Airbus's achievement under him of overtaking Boeing and the successful launch of the A380. The last thing he needed was any bad news about this ambitious project. By the time a six-month delay became public, he had already been named as the French chief executive of EADS. He had to share with a German, but he managed to hold on to oversight of Airbus. Arnaud Lagardère, son of the group's founder and by then its boss, had a preference for keeping Mr Camus. But Mr Forgeard had a more powerful mentor, his old boss, now the president of the republic. According to a recently published biography* the young Lagardère's hand was forced by a threat to cause inheritance-tax problems over his late father's estate. The head of the then finance minister's private office told the author of the biography the pressure put on Arnaud Lagardère came at the express wish of Mr Chirac.
So a diktat from a right-wing president of the republic provided a dramatic twist to the tale. Mr Forgeard, who was fired last summer as mounting problems rocked the company, sold 162,000 EADS shares and members of his family a further 128,000 last March, only weeks before news about delays to the Airbus A380 became public. They pocketed a profit after tax of €2.5m on the transactions. Investigators are concerned that Mr Forgeard might have been aware that further delays to the programme, which was already running six months late, would soon be announced.
In early April the Lagardère group agreed to sell half its 15% stake in EADS for €2 billion ($2.5 billion), or the equivalent of €32.60 a share. It was a week before more delays to the Airbus A380 became known to the board of EADS, according to Mr Forgeard. The programme was already running six months late. Lagardère had been looking to reduce its holding for three years. Questioned about the sale, Arnaud Lagardère said: “I have the choice of appearing dishonest or incompetent...I plead the latter.” Since the full extent of the delays has emerged, EADS shares have fallen to €21. The ensuing cash-flow loss is now reckoned to be €6 billion over the next four years.
A French state-owned bank, CDC, signed up for nearly one-third of the shares that Lagardère was selling. This purchase was intended to keep the French stake (the government owns 15%) superior to Germany's share of EADS. Because of the slump in EADS's share price, the French bank is now sitting on a loss of €200m on the stake it agreed to buy for €600m. This, and the earlier privatisation, mean that the French taxpayer has twice got the worse of a deal with Lagardère.
In oral evidence to a French parliamentary committee in June, Mr Forgeard denied that he (or other insiders who sold shares in March) had done anything wrong. One insider who did not sell was Mr Forgeard's German counterpart, Tom Enders. He thought it was inappropriate to sell because of the impending sale of 7.5% by DaimlerChrysler, the company which had appointed him as co-chief executive. The sale of the German company's shares will reduce its stake to 22.5%.
One consequence of the mess at Airbus could be that the French, German and Spanish governments may even end up increasing their stakes as DaimlerChrysler and Lagardère sell further shares. If so, it would mean privatisation and re-nationalisation in less than a decade, which may not do Airbus any good at all.
AS FRENCH stock-exchange regulators investigate share sales by Noël Forgeard, a former co-chief executive of European Aeronautic Defence and Space, questions are being raised about a controversial deal that eventually led to the creation of EADS, the parent company of Airbus. This was a privatisation overseen by a former finance minister, Dominique Strauss-Kahn, who is one of two rivals to Ségolène Royal in the contest next week for the Socialist candidacy in the 2007 French presidential election.
The deal was supposed to provide Airbus with a long-term French private-sector shareholder. Instead it risks driving the now-ailing aircraft-maker back into increased state ownership.
The tale is a sorry one: of a Socialist government selling off a state company—Aérospatiale (a leading partner in Airbus)—at a bargain-basement price to a firm belonging to an influential entrepreneur; of his protégés spending more time fighting each other than attacking Airbus's rival, Boeing; and of the new owner baling out at a vast profit, in part by selling shares back to the government, just before the scale of the mismanagement was made public.
The deal that doomed Airbus has its origins in the late 1990s. Back then a series of American aerospace mergers left the fragmented European aerospace industry looking outgunned. Rationalisation was badly needed. There was growing pressure to convert Airbus into a fully-fledged private company.
Airbus's German partner, DaimlerChrysler, and its British one, BAE Systems, were listed companies. They had no wish to merge their aircraft interests with Aérospatiale. The state-run French company's most valuable asset was its 37.9% share in the Airbus consortium. If the British and German firms were to merge, as they once planned to, France would end up as a junior partner in Airbus, an enterprise which is synonymous with French national pride. So Aérospatiale, which had been the French partner in the Concorde supersonic passenger jet and was the maker of Exocet missiles, had to come under private control.
Enter the Lagardère group, which has diverse businesses from magazines to missiles. It was founded by Jean-Luc Lagardère, who died in 2003. He was an astute entrepreneur who built a business empire with the help of his talent for hiring bright, well-connected civil servants. One of these was Mr Forgeard, a former adviser to Jacques Chirac in his time as prime minister before he became France's president. Mr Forgeard joined Matra, a defence firm, in 1987. Another useful attribute of the group was a media business that included the Europe 1 radio station, France's only Sunday national paper and Paris-Match. This ensured Mr Lagardère was courted by politicians, which put him in a powerful position when the government contemplated how to privatise Aérospatiale.
For the benefit of France
The terms of the deal were hammered out by Mr Lagardère and Mr Strauss-Kahn. Lagardère got 31.5% of Aérospatiale in return for folding into the company its defence-aerospace business, Matra Hautes Technologies (MHT). Lagardère would own one-third of the merged firm and have management control. The understanding was that Lagardère would always be the principal French private shareholder; the idea was to secure the group's future with a strong core shareholder—what the French called a noyau dur. The government would reduce its two-thirds share to 48% by selling 17% of the shares to the public. The terms were generous to Lagardère: Aérospatiale was by any measure (sales, assets, employees) at least three times bigger than MHT, a comparative minnow.
AP An Airbus pair: Noël Forgeard and Arnaud Lagardère
News of the deal emerged in late July 1998, just as the French were packing their suitcases for their holidays. It was completed in June 1999 once all the formalities had been gone through. Part of this process was a review of the deal by court-appointed accountants. Their job was first to ascertain whether the MHT shares were worth at least their value of €618m in Lagardère's books. This they had no trouble doing, and their report is a matter of public record. The trickier task was to justify the one-third share of the much bigger company allotted to Lagardère. Their full report on this aspect is not a matter of public record, but their findings are contained in a document, a copy of which was obtained by The Economist, that Aérospatiale Matra had to file with the French stock exchange before the sale of shares to the public.
The experts clearly found themselves in a difficult position, as they noted. The document talks of “three key limiting factors” in their assessment process which “could affect the exchange value to an extent that it is difficult to put into figures.” One factor was “limited or late access to certain important information”. Another was “uncertainties beyond the normal range of forecasting” and a third was “assumptions underlying the preparation of cash-flow projections”. The basic justification for handing over as much as one-third of the shares to Lagardère was the strategic importance of the transaction for the French aerospace and defence industries and “risks for the Lagardère group”.
One leading Paris analyst, Jean Gatty, put a value on MHT in the range of €750m-1.4 billion. After the first day of dealing in the shares of Aérospatiale Matra, the one-third stake that Lagardère got in return for MHT was worth €2.8 billion. No wonder that at a recent aviation conference in Monte Carlo, attended by the legendary former Airbus boss, Jean Pierson, an Aérospatiale man to the core and whom Mr Forgeard replaced shortly before the deal, Airbus alumni were calling it “the hold-up of the century”. Airbus veterans are bitter at what “the Lagardère boys”, as they are known within the aircraft-maker, have done to the organisation they built up to take on Boeing.
In-flight manoeuvres
Several months after its creation, Aérospatiale Matra announced a merger with the aerospace arm of DaimlerChrysler to form EADS (a Spanish government body owns a 5.5% share and BAE Systems has since sold its Airbus stake back to EADS). Lagardère's right to control the management of Aérospatiale Matra translated into the right to nominate the four French directors of the Franco-German company. The two-headed nature of the firm meant it had to have a French and a German chairman as well as two chief executives, one from each country. This cumbersome structure was bad enough, but longstanding rivalry between Mr Forgeard as chief executive of Airbus and another Lagardère boy, Philippe Camus, his superior as initial French chief executive of EADS, made it progressively dysfunctional. Tensions grew not only between the French and the Germans but also between the parent company and its Airbus subsidiary (which accounted for four-fifths of its profits).
By the time Mr Forgeard had taken the reins at Airbus in 1998, its A320 and A330 models were flying off the shelves. Its new super-jumbo, the A380, was already being developed and the company was beginning to catch up with Boeing. Mr Camus had become the most senior figure in the Lagardère group next to its founder and chairman. On his way up the corporate ladder, Mr Camus used to report to Mr Forgeard, when the latter was running Matra Défense before leaving Lagardère to become boss of Airbus. But the Franco-German merger propelled Mr Camus to the top EADS job, and the tables were turned. Knowing that Mr Camus and his German counterpart had five-year contracts, due to expire in 2005, Mr Forgeard started to manoeuvre to replace Mr Camus. Not only that, he wanted to be the sole chief executive—which antagonised the Germans, always nervous about French attempts to dominate both EADS and Airbus.
Mr Forgeard's main claims to the top job would be Airbus's achievement under him of overtaking Boeing and the successful launch of the A380. The last thing he needed was any bad news about this ambitious project. By the time a six-month delay became public, he had already been named as the French chief executive of EADS. He had to share with a German, but he managed to hold on to oversight of Airbus. Arnaud Lagardère, son of the group's founder and by then its boss, had a preference for keeping Mr Camus. But Mr Forgeard had a more powerful mentor, his old boss, now the president of the republic. According to a recently published biography* the young Lagardère's hand was forced by a threat to cause inheritance-tax problems over his late father's estate. The head of the then finance minister's private office told the author of the biography the pressure put on Arnaud Lagardère came at the express wish of Mr Chirac.
So a diktat from a right-wing president of the republic provided a dramatic twist to the tale. Mr Forgeard, who was fired last summer as mounting problems rocked the company, sold 162,000 EADS shares and members of his family a further 128,000 last March, only weeks before news about delays to the Airbus A380 became public. They pocketed a profit after tax of €2.5m on the transactions. Investigators are concerned that Mr Forgeard might have been aware that further delays to the programme, which was already running six months late, would soon be announced.
In early April the Lagardère group agreed to sell half its 15% stake in EADS for €2 billion ($2.5 billion), or the equivalent of €32.60 a share. It was a week before more delays to the Airbus A380 became known to the board of EADS, according to Mr Forgeard. The programme was already running six months late. Lagardère had been looking to reduce its holding for three years. Questioned about the sale, Arnaud Lagardère said: “I have the choice of appearing dishonest or incompetent...I plead the latter.” Since the full extent of the delays has emerged, EADS shares have fallen to €21. The ensuing cash-flow loss is now reckoned to be €6 billion over the next four years.
A French state-owned bank, CDC, signed up for nearly one-third of the shares that Lagardère was selling. This purchase was intended to keep the French stake (the government owns 15%) superior to Germany's share of EADS. Because of the slump in EADS's share price, the French bank is now sitting on a loss of €200m on the stake it agreed to buy for €600m. This, and the earlier privatisation, mean that the French taxpayer has twice got the worse of a deal with Lagardère.
In oral evidence to a French parliamentary committee in June, Mr Forgeard denied that he (or other insiders who sold shares in March) had done anything wrong. One insider who did not sell was Mr Forgeard's German counterpart, Tom Enders. He thought it was inappropriate to sell because of the impending sale of 7.5% by DaimlerChrysler, the company which had appointed him as co-chief executive. The sale of the German company's shares will reduce its stake to 22.5%.
One consequence of the mess at Airbus could be that the French, German and Spanish governments may even end up increasing their stakes as DaimlerChrysler and Lagardère sell further shares. If so, it would mean privatisation and re-nationalisation in less than a decade, which may not do Airbus any good at all.