Since last March, AlphaValue has made the case that the pandemic was opening the door to a rebalancing of stakeholders’ say in corporate life at the expense of shareholders and that governments would be fully legitimate to call the shots after throwing so much money at the corporate world.
We never expected that the liquidity provided to shareholders (an implied put option) to be matched by a government call option to be exercised on Food Retail as happened last week. Indeed, the French government said it was in charge of deciding whether the 20% Food Retail market share of Carrefour was a strategic risk such that it could not land in the hands of a benevolent Canadian, family-controlled business. The political conclusion is that it is strategic so that the Quebecois were sent packing. As a margin comment, this was unceremonious and in contrast to the comparably easy purchase of Bombardier’s rail assets by Alstom.
That French government’s position came as a surprise so that we opened the 2020 Directive that bans foreign (i.e. non-European) investments of above 10% of listed businesses if they belong to sectors which are so broadly defined that the bulk of listed businesses could buy themselves time by making use of that directive in case of a hostile bid.
Such sectors include the full value chain of the food industry as food security is a risk, media (as ever) and an additional set of seven forefront technologies: biotechs, quantum research, AI, robotics, semiconductors, energy storage and cybersecurity.
We went through the AlphaValue coverage of supposedly ‘French’ assets (even though many have headquarters as NVs those days which brings some spice to the issue of who is in charge when it comes to stakeholders’ views) to try and see which company would not fall in the above categories. Say combing through 102 names with a combined market cap of €2,200bn.
We will provide the file to whomever wants to check (email@example.com), no questions asked. The result is clear: about 69% of the market cap is out of reach (83% of revenues) for non-European buyers. That proportion does include banks and insurances as they are regulated anyway and out of reach without a regulator’s blanc-seing.
Maybe France is too explicit/transparent about its toolbox to contain foreign ambitions, but such proportions are simply absurd.
While there are 20 Chinese for each French citizen, it would be better to open up to external capital and keep an open mind rather than batten down the hatches and hope for the best on a small sliver of entrepreneurs. France could do better to wonder how 9-times smaller Switzerland (population-wise) can nurture such powers as Roche, Novartis, ABB or Nestlé.
But who cares?
One would expect French listed assets to suffer valuation-wise from this state of affairs. We looked at relative P/Es of assets ‘free to trade’ (essentially Luxury, unless somebody thinks it is strategic) vs. those of the untradable assets. The first group has been dubbed ‘Unchecked France’ and the second ‘France Checked’.
We looked at P/Es over 15 years. That the ‘free’ stocks trade at a premium is clear but presumably much owed to the growth profile/quality of those assets. The dynamic of their P/Es matched to that of the France under (untold) control shows no signs that investors would care by expanding that premium in a lasting way. The premium actually fell with the pandemic’s ability to put all assets on a same footing, i.e. that determined by central banks.
Maybe the French government’s posture comes with limited costs after all.