Big PTOs and their state owners are nothing if not slaves to financial fashion. Over the years, they have watched each other lemming-like to see what each new piece of financial engineering can produce, before jumping in after the first-movers whatever the outcome: bond issues, spin-offs, rights issues, etc.

Last month, the French government announced plans to sell just under 10% of the holding with which it controlled France Télécom (FT) for around €5bn. Today, the German authorities announced plans to dispose of around 6% of Deutsche Telekom (DT) in a sale which could raise €4bn on top estimates.

The only significant difference between the German and French sales is that the latter, which concluded on 13 September, saw the state’s controlling stake in FT reduced to below 50% for the first time; the authorities hold just over 42% after the sale (a fact which annoyed FT’s unionised workforce). By contrast, the German state currently holds only a 43% minority in DT; this should fall to around 36% if the sale goes off as planned. It has already fought many of its battles with DT employees.

Follow the leader?
The similarities between the two initiatives are more interesting. In both Germany and France, the driver has been the need to fall within EU limits on public sector debt for the current financial year. Underlying public expenditure trends in the two big European economies suggest that additional dilutions of state telco ownership stakes could become an annual occurrence over the next five years or so.

Both sales feature disposals by state financial holding entities – ERAP in France and KfW in Germany. – whose status as holder’s of the state’s stake was designed to ensure the clear separation between the government’s twin roles of owner and regulator. File this one away in the folder marker “If you believe this…”. ERAP was the centre of the soft €9bn loan to FT which Paris sanctioned in 2002. KfW is owned by the federal government and the Länder. The pair might technically be independent shareholders, but they are not independent of the state in any meaningful sense when applied to corporate governance.

This was reinforced in the case of the FT disposal, where the shares were placed in the hands of ‘friendly’ institutions. Germany is set to follow suit. Such moves are reminiscent of the Italian government’s preference for a nocciolo duro (‘hard core’) of institutions favourable to the state’s lasting influence during the sales of successive tranches of Telecom Italia in the 1990s.

Business as usual
Forget free market rhetoric and don’t miss the point here. Institutions will back these deals if by their support they are given a tacit understanding that the state and the institutions share a common goal. This means that when things go bad the state will safeguard the interests of the carriers (and thus the institutions) in exchange for the latter’s continued loyalty. With companies like DT and FT still struggling under debt burdens while seeking new opportunities to expand, this should not be overlooked as predicaments demanding ‘nuclear’ solutions can never be far away.

This also informs our take on the extent to which these share sales can be seen as barometers of market optimism. In the controlled relationship between the state and the institutions, they are positive. The failure to open up these sales to smaller investors suggests the opposite, a negative sentiment which is compounded by the suspicion that parceling out ownership of ‘flag carriers’ in this way is a potential subterfuge for the next big attempt to adulterate the true role of market (and stock market) forces.
Jim Chalmers