Nuclear Fission - Siemens and Areva

Jan 29th 2009 | PARIS
From The Economist print edition
http://www.economist.com/business/PrinterFriendly.cfm?story_id=13022201

Franco-German industrial relations take a sharp turn for the worse.

"THIS is not the way you behave in business-normally you send signals,"
spluttered a French nuclear executive this week at the news that Siemens,
Germany's engineering giant, would divest the 34% stake it has held since
2001 in Areva NP, a Franco-German joint venture in nuclear reactors. Until
this week Areva NP was an example of a successful partnership between French
and German companies in a promising industry. Nuclear power is in the midst
of a global comeback, and Areva NP's new design, the European Pressurised
Reactor (EPR), is leading the field against competing blueprints from
American and Japanese rivals.

Being a minority shareholder, the German firm complained, "considerably
limits the entrepreneurial manoeuverability of Siemens within the joint
venture." Siemens had been trying to increase its influence, either by
lifting its stake in Areva NP to 50%, or by swapping its share of the joint
venture for a slice of the company's French parent, Areva. But the French
government, which has a majority stake in Areva, blocked Siemens's
ambitions, probably because it wants to stay in control of a strategic
industry. The German firm now intends to exercise a put option, meaning that
Areva will have to stump up around €2 billion ($2.6 billion) to buy back the
stake at some point over the next three years. There is a small chance that
Siemens will get its way after all-its decision will not be final until
Areva buys back its shares-but that is unlikely, says an insider.

Siemens will have agonised over the decision. Walking away from Areva NP
means turning its back on a big chunk of its former assets. It became a
shareholder in Areva NP not just by contributing money, but by bringing
Germany's entire nuclear-power industry to the venture. It could have chosen
to develop its own nuclear business, but decided instead to seed a
Franco-German partnership. The two companies are closely intertwined: Areva
NP has about 3,600 German employees, and the engineering for its first EPR,
now under construction at Olkiluoto in Finland, is based at one of Siemens's
production units near Nuremberg.

The Germans have long feared that the French government planned to squeeze
them out of Areva, and may have decided to pre-empt such a move. Nicolas
Sarkozy, the president of France, wants to create a national nuclear-energy
champion, and Alstom, a French engineering company, has been lobbying hard
for a merger with Areva. A decision on Areva's future ownership is expected
soon, and since Alstom would replicate what Siemens does, the German company
was an obstacle. The sudden rupture probably also reflects poor relations
between the French and German governments following Mr Sarkozy's initiative
to form a Mediterranean union which initially excluded Germany.

Nevertheless, the decision came as a shock to Areva. Until this week, says
Nicolas Véron of Bruegel, a Brussels think-tank, Areva NP was the main
counter-example to the general presumption that Franco-German industrial
ventures do not work. "It would be a big blow to the bilateral relationship
to see this one disappear too," he says. At EADS, a Franco-German-Spanish
aerospace group that is the parent of Airbus, relations have been strained,
with the Germans often suspecting the French of trying to grab power. The
deepest wound was inflicted five years ago when Aventis, a drugs company
formed in 1999 by a merger between Germany's Hoechst and Rhône-Poulenc, a
smaller French firm, merged with Sanofi-Synthélabo, which was also French.
The deal, strongly supported by Mr Sarkozy, then France's finance minister,
meant that the company became more French than German.

Siemens's exit is bad news for Areva, too. Areva's chief executive, Anne
Lauvergeon, is fiercely opposed to a merger with Alstom, and the German
firm's retreat removes an important line of defence. Eventually Areva will
face a new competitor as Siemens develops its nuclear capabilities, perhaps
in partnership with Atomenergoprom, a Russian state-owned nuclear-energy
firm with which it already has a relationship. For its part, Areva argues
that it needs money all the more urgently now that it has to buy out
Siemens's stake and fund the development of the EPR on its own. "A merger
with Alstom would not bring adequate financial resources," says an Areva
executive. Areva's preferred option is to issue more shares on the market,
thus reducing the government's control.

For the time being Siemens and Areva will still be bound together in one way
at least. Teollisuuden Voima (TVO), a Finnish utility, is demanding €2.4
billion in compensation from the two firms for delays in building the EPR at
Olkiluoto, and they in turn are demanding €1 billion from TVO. The former
partners will be seeing plenty of each other in court. Beyond that, however,
it may be time for Areva to rename its reactor the "FPR".