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02 May 05. PIERRE TRAN of Defense News reported that a new attempt by French defense systems company Thales to break out of its strategic industrial stalemate has fallen victim to the government’s political paralysis and cautious shareholders wary of ambitious cross-border mergers.

On April 26, Executive Chairman Denis Ranque presented several strategic options to the Thales board of directors. One was a three-way merger among Thales, telecoms equipment maker Alcatel and Italy’s state-owned Finmeccanica; another was a merger between Thales and Alcatel, a government official said. Alcatel, which holds 9.5 percent of Thales capital, and is keen to expand its military business. The government holds another 32 percent.

But Defense Minister Michèle Alliot-Marie takes every opportunity to push her top priority for Thales: a swift creation of a naval joint venture with French shipyard DCN, a ministry official said.

“It is a matter of urgency, she believes,” the official said. “Putting the naval sector in order is the point of departure for everything.”

Alliot-Marie worries that the creation of the ThyssenKrupp Marine Systems industrial group has put Germany ahead in naval consolidation, and that France is unable to tell British industry who it would be working with on the two-nation, cooperative aircraft carrier program, the official said.

And any deal with Italy would also involve the naval sector; Thales works on warship programs with Orizzonte, the Italian joint venture between Finmeccanica and Fincantieri.

Bad Timing

Ranque, mindful of the coming handover of power at EADS, sought guidance from the board about which strategic option to pursue, the government official said. EADS chief executive designates Noel Forgeard and Tom Enders are due to take over from Philippe Camus and Rainer Hertrich in May. French and German executives are jockeying for positions at the division level of the defense and aerospace giant amid widespread uncertainty and management distraction.

But Ranque’s timing was off. The French government is focused on a May 29 referendum on the European Union constitution, which has been seized upon as a no-confidence vote against conservative President Jacques Chirac. Chirac’s popularity is at a three-year low, according to a CSA Opinion poll published April 27 in La Vie and for

France Info radio.

Whatever the referendum’s outcome, a government reshuffle is widely expected, and Alliot-Marie is tipped as a frontrunner against Interior Minister Dominique de Villepin for the prime minister’s job.

“There are question marks over who will be in which ministry,” an industry executive said. “The timing [of the board meeting] was all wrong. People’s minds are elsewhere.”

A Thales spokesman said Ranque had presented the options as a work-in-progress report. “The board noted that there was no urgency and did not validate any of the options,” he said.

Thales’ Potential

Privately, Thales and Alcatel executives are angry at what they see as hostile press leaks aimed at destabilizing the former and painting the latter as the villain. Alcatel Chief Executive Serge Tchuruk categorically denied a report in the French daily Les Echos that he objected to the three-way merger and that he had asked for Ranque’s resignation. The April 27 report said Ranque wanted to bring in Finmeccanica as a counterweight to Alcatel, with each having 25 percent of Thales’ shares.

Tchuruk, at an April 28 news conference announcing Alcatel’s first-quarter results, said it was up to the French government, Thales’ leading customer, to decide what it wanted to do with the company, adding that Britain, as a large client, also had a say.

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