Privatization is sweeping Western Europe Many state-owned companies for sale

June 01, 1993|By Ian Johnson | Ian Johnson,Securities Data Co.Staff Writer

Whether driven by out-of-control budget deficits, embarrassingly inefficient services or just a new-found commitment to the open market, Western Europe's governments are embarking on an unprecedented round of privatization.

The moves, which could fill governments' coffers with $65 billion over the next two years, would see the sale of companies such as Renault, Air France and VEBA -- symbols of state-owned business might that was once touted as la difference between continental Europe's government planning and other countries' heavier reliance on the market.

Besides marking a fundamental shift in the governments' perception of their role in running the economy, the sales could help modernize the continent's economies and turn the nations' parochial equity markets into modern, liquid sources of capital for entrepreneurs.

"This is a huge change, but more in terms of the culture of the people.

This privatization should be seen as part of this change -- that the state doesn't have to run companies," said Alessandro Maria Cremona, general manager of Nomura Italia.

However, the huge sale of companies comes at a relatively poor time for new sales of stock in Europe. While bringing the chance of greater returns than those found in U.S. stock markets, the new issues are fraught with difficulties and could be delayed for months or years before they actually hit the market.

The flood of sales, in the works for months, was highlighted last week by the new French government's announcement that it wanted to sell 21 companies, including the computer company Groupe Bull and Elf Aquitaine, a big oil company.

France's sales culminate a decade's worth of work to cut back the role of the state in the French economy, but other countries seem to have less firm reasons for their planned privatization moves.

Italy, for example, has dozens of companies for sale, including a number of profitable banks and insurance companies. Pietro Modiano, head of financial and economic research for one of those banks, Credito Italiano, said the sales are driven more by a need for money than a strong belief in the market.

"There's little ideological support for privatization. The government just needs cash," Mr. Modiano said.

A more fundamental side benefit, however, could be to help their equity markets become more liquid. Italy's stock market is dominated by a few big companies still in family hands. The shares traded are usually minority stakes in the companies, leaving shareholders with little power over how the companies are run.

"It wasn't a modern equity market; it was a chance for families to sell off some of their equity," said Paul Ehrlichman of Brandywine Asset Management Inc.

The new sales will boost the number of shares in the stock markets and introduce fully traded companies, he said. That could help turn European equity markets into sources of capital for beginning entrepreneurs, something lacking in the European economic structure.

The underdeveloped state of European equity markets, however, could also foul up the privatization plans. Andy Williams of Glenmede Trust Co. said the London Stock Exchange, for example, has seen $50 billion in new stock issues this year. With the government planning an additional $7 billion for British Telecom alone, investors could be overloaded with new equity.

"There may be too much paper out there for investors to handle," Mr. Williams said.

Capital flows into Europe also seem troublesome. In 1990 and 1991, $20 billion a year poured into Europe's capital markets, about one-third of what is needed for the current sales, though the sales will be spaced over several years.

Combined with a general weakness in many of the European markets, a lack of investor interest could drive down prices, disappointing cash-hungry governments seeking big returns on privatization moves.

That sort of weakness in the stock market has caused governments to back off from past privatization plans.

"We're probably in the bottom of the eighth for the appetite for these privatizations. There's still appetite, but the easy money is no longer to be made through selling off state companies," said Robert LaFleur, chief investment strategist for Northern Trust Co.

If the companies are sold for lower prices, Mr. Ehrlichman said, they stand a good chance of improving in price. Once free of government control, many will be able to cut staff and increase profits, which should help the stock prices.

One side effect could be to improve the services that Europeans receive. If Germany, for example, privatizes its huge telecommunications monopoly, Telekom, consumers could probably expect only better service from a utility renowned for its slow hookups, high prices and surly customer relations.

"This is really a chance to step away from the negative sentiment that's in Europe," Mr. Ehrlichman said. "So many people are down on Europe's prospects that they don't see the positive developments."


A sampling of European state-owned companies to be privatized:

Company name .. .. Country .. .. Industry .. .. Date .. .. Proj. price

Credito Italiano .. Italy .. .. .. Banking .. ..1993 .. .. $3.5 billion

ENI .. .. .. .. .. ..Italy .. .. ..Energy .. .. 1994 .. .. N.A.

Repsol .. .. .. .. ..Spain .. .. ..Energy .. .. 1993 .. .. $500 million

Tabacalera .. .. .. Spain .. .. ..Tobacco .. ..1993 .. .. $1 billion

Rhone-Poulenc .. .. France.. .. ..Chemicals .. 1994 .. .. $1.4 billion

Credit Lyonnais .. ..France .. .. Banking .. ..1994 .. .. N.A.

British Telecom.. ..Great Britain..Telecomm. .. 1993 .. .. $3 billion

National Power .. ..Great Britain..Energy .. .. 1994 .. .. N.A.

Lufthansa.. .. .. .. Germany .. .. Airline .. ..1995 .. .. N.A.

Telekom .. .. .. .. Germany .. .. Telecomm. .. 1996-97 .. $40 billion

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