Friday, April 29 2005 11:00 am

While the US government is moving toward nationalization of some major US companies, the French government is accelerating its drive to turn over ownership and control of major French companies to private investors.

I have to admit I couldn't resist the irony of juxtaposing these two statements. Both statements are true, as you will see in a minute, and that's probably a surprise to all readers of this column. But this is not due to any fundamental policy or ideology shifts by either government. It is happening nonetheless. Here are the details:

Let's start with France. Almost a decade ago, European Union regulators cut off state aid to various industries, including airlines. Although at times reluctant to comply with these regulations, European governments have recently found new enthusiasm in selling off their government-owned stakes in businesses as one way to resolve their budgetary deficits. In the first quarter of 2005, the French government announced its intention to sell 20 billion euros worth of equity this year (around $26B), including parts of Gaz de France and Electricite de France. Indeed, privatization of government-owned businesses has become so popular among European governments that total equity issuance in the first quarter of 2005 reached its highest level since 2000 ($54 billion, up 21% from the same period last year), outpacing the US for the first time in five years. So the trend in Europe is now firmly toward private industries and away from government-owned industries, and the trend is accelerating.

Meanwhile, in the US, where government ownership of business is usually thought to be an anathema, the trend has suddenly and surprisingly shifted toward government ownership in at least one major industry. A little noticed effect of an agreement reached last Friday between United Airlines and the Pension Benefit Guarantee Corporation (PBGC) could result in the US government becoming the largest shareholder in United Airlines! The agreement, not yet approved by the bankruptcy court, calls for United, upon emerging from bankruptcy, to give the PBGC $500 million in new convertible preferred stock plus $1 billion in debt obligations as settlement of the $6.6 billion liability that PBGC will inherit when it takes over United's four employee pension plans. (Note: there is nothing usual about the structure of this deal - it would be a very familiar deal structure to any private equity fund operating in the same situation. It's just noteworthy that it is the US government instead of a buyout fund that ends up with the big equity stake.) Depending on the valuation of United at the time it exits bankruptcy, the conversion provisions of PBGC's convertible preferred shares, and the distribution of the newly issued common shares, the PBGC could end up the largest shareholder.

The US government already owns a stake in US Airlines due to a similar deal with PBGC, and could even become the majority stakeholder of US Airlines if current merger talks with American West collapse, according to the Financial Times. Potential bankruptcies by Delta and other airlines could cause PBGC to obtain significant equity stakes in those airlines as well. On top of that, the Airline Transportation Stabilization Board, which is chartered to oversee the federal loan guarantees to the industry, controls warrants covering one third of America West's equity, and also has ownership stakes in other airlines. Put all of this together, and we have a surprising new trend in the direction of government ownership and perhaps even control of US-based air carriers.

Could this type of back-door nationalization creep into the US telecommunications sector as well? Bankruptcies of Lucent, Qwest, and/or a Qwest/MCI combination are all still within the realm of possibility, and could result in the same kind of PBGC deal that United and US Airlines struck, with similar consequences. As I pointed out in my November 15 and December 10 2002 columns, the US government would almost certainly move proactively to nationalize its air transportation and telecommunications infrastructures, if necessary, before it would allow serious service disruptions to occur due to bankruptcies. However, it appears that Washington decided a few years ago to allow the old telecommunication monopolies to re-form in order to prevent this type of scenario from unfolding. Last year, after years of struggling, the FCC and the federal courts finally gave the Baby Bells back monopoly control over their local loops. This year, the FCC and DOJ are expected to allow AT&T to merge with SBC, and MCI to merge with either Qwest or Verizon. Once those mergers are approved, we are only three or so mergers away from having the old Bell System monopoly back in place. As I postulated in a previous column, this result may be the best solution all around for a very bad situation, and regulated monopolies have proven historically to be a better solution than nationalized industries.

A return to regulated monopolies could be arranged for the airline industry as well, of course, and may be necessary to give that industry the financial stability to allow the government to re-privatize by selling its equity stakes to private investors. (That will mean that we will have come full circle with the great US infrastructure deregulation experiment that started around thirty years ago with the airline and telecommunications industries ...)