21 Jun 2010

(by Bruce Lyons) The in the collapsing civil nuclear technology joint venture between France’s Areva and Germany’s Siemens. This announcement made earlier this month turns out to have a considerable back-story, including another squabble between President Sarkozy and Chancellor Merkel. But is the key issue competition? Or international politics? Or tactics in contract renegotiation?

Most joint ventures have some form of time-limited ‘non-compete’ clause to encourage full commitment to investment and knowledge sharing. The competition issue is to get the balance right. Presumably, the Commission assessed any non-compete clause it was told about at the time the JV was formed. The JV was cleared in 2000 subject to commitments after a Phase II merger investigation. As interested readers can find out below, the JV turned sour and Siemens pulled out last year. The Areva buyout was also cleared by the Commission under its express merger procedure, though the price seems to be subject to on-going arbitration. A year later, the Commission has started an in-depth investigation (under Art.101/102) into non-compete clauses that continue after the break-up.

The intrigue is that newspaper reports suggest it was about a previously undisclosed non-compete clause. The timing appears to be that it did so shortly before withdrawing from the JV with Areva, and then only a few weeks later agreeing a new JV with Russia’s state nuclear company Rosatom. When the dust settles, it looks like the main competitors will be Westinghouse/Toshiba, General Electric, Areva and, when allowed to compete, Rosatom/Siemens. The trouble is that Areva may be able to prevent the latter competing effectively until 2020 – unless the new clause is struck down.

Presumably, the Commission’s main task will be to identify the duration of a non-compete clause that balances the pro-competitive effect of encouraging confident and effective entry by a JV, against the anti-competitive effect following a breakdown. A subsidiary task will be to see whether there was deliberate deception during the merger investigations of the original JV or its break-up. Quite separately, Siemens will see commercial value if it gets the clause declared illegal by the Commission. While it is conceivable that it has had a pang of conscience in confessing to Brussels, the timing in relation to the Rosatom deal makes one suspicious. But what puzzles me is why Siemens and Areva allegedly kept some aspects of the non-compete clause secret. What could be the value of a secret non-compete clause that one side could not enforce against its reluctant former partner? If found in breach of Art. 101/102 they could also face a heavy fine, which would be a highly costly way to renegotiate a contract.

For those of you who want the full soap opera…

…I will try to keep it as short as possible. Areva was formed in 2001 by a consolidation of the French nuclear power industry and inherited a joint venture with Siemans who retain a 34% stake in Areva NP. Areva is state-owned and covers all aspects of nuclear power. Siemans is a corporation listed in Frankfurt and New York, with global reach in energy markets. France has long been a champion of nuclear power from which it generates 75% of its electricity. Germany retains long-standing safety concerns and currently has a moratorium on nuclear plant construction. In 2007, the French government made known that it found the joint venture with Siemens compromised as long as the German moratorium continued. Siemens argued that there were plenty more markets and it was frustrated by its lack of control. It wanted to increase its share of the JV to 50%. There appeared to be an impasse until last year.

Meanwhile, the demand for nuclear power is set to surge as energy security, global warming and, most recently, oil pollution alter the balance against traditional nuclear cost and safety concerns. To complete the background, I should also mention that France’s Alstom wants to merge with Areva whose boss is set against it; that Alstom was bailed out by French state aid to save it from a takeover by Siemens in 2004; that Alstom’s boss is a close friend of Mr Sarkozy who lobbied hard for the earlier aid; and that Mr Sarkozy apparently wants to create a French national champion by merging Areva and Alstom.

Russia has a substantial programme for new nuclear power stations but given Siemens’s complaint about its minority share of the Areva JV, it seems to be jumping out of the French frying pan into the Russian fire. . This may or may not have anything to do with rumoured details in the Areva contract limiting the non-compete clause to leadership of a rival JV. Given that Areva is short of investment funds and Siemens may have leverage over the supply of turbines, etc., the bottom line is that the contract will be renegotiated, and the real question is: on what terms? Several billion Euros are at stake and the Commission’s decision may have a substantial influence on the answer.