FOCUS: Areva Still Needs Cash Despite T&D Sale

Despite selling its transmission and distribution business for EUR4.1 billion, French state-controlled nuclear engineering Areva SA (CEI.FR) still needs billions more of funding to realize its substantial expansion program.

And to come up with the EUR7 billion or so of additional money for investment, Areva may have to sell more of its family silver, possibly as soon as 2010.

"Financing remains an issue," SGCIB's analyst Gael de Bray said. He rates Areva at hold. "Though the EUR4.1 billion sale of T&D should help," the analyst added.

Areva has budgeted around EUR2.6 billion annually for capital expeditures in 2010-2012, as it pushes its leading-edge Evolutionary Pressurized Reactor, or EPR, into markets around the world, Chief Executive Anne Lauvergeon told analysts earlier this week.

The company is aiming to sell around 50 of its EPR reactors globally.

Areva is surfing on a swelling wave of renewed interest in clean nuclear energy in an era of environmental awareness. Currently, 30 countries are operating nuclear plants and 43 more are considering a civil nuclear programme, according to Lauvergeon.

Despite some teething problems with the technology, 11 utilities around the world have selected the EPR. These include Germany's E.ON AG's (EONA.XE) U.K.-based operations, China's CGNPC, France's Electricite de France (EDF.FR) and GDF Suez (GSZ.FR), India's state-owned NPCIL, Finland's TVO, U.S.-based Constellation Energy Inc (CEG) and Italy's Enel (ENE.MI).

The group also plans to expand in other green energies, such as wind power and biomass, and is working on nuclear plants' life extension.

The EPR's introduction hasn't been smooth. Beyond industrial investment, Areva faces substantial cost overruns related to its delayed reactor program in Finland, where it is buiding its first EPR.

The overruns will add to Areva's financing needs. Areva has booked EUR2.3 billion of charges to cover potential exposure to the Finnish Olkiluoto project. The contract's initial value to Areva was EUR3 billion, and the on-going feud between Areva and its customer TVO could mean even more cost charges, CM-CIC's analyst Patrice Lambert de Diesbach said. He rates Areva at hold.

A further drain on its pocketbook is Areva's need to buy out Germany's Siemens AG (SI), which decided at the start of the year to exercise a put option and walk away from its tie-up in Areva's nuclear power unit Areva NP. Siemens' 34% stake in Areva NP is worth around EUR2 billion, according to analysts' estimate.

Areva was forced by the French State, which directly and indirectly controls 93% of it, to sell T&D in order to contribute to the company's estimated EUR11 billion medium-term investment plan.

The company this week entered exclusive talks with a consortium comprising French engineering firm Alstom SA (ALO.FR) and electric equipment maker Schneider Electic SA (SU.FR), which is paying EUR2.29 billion outright for the unit, while agreeing to take on T&D's debt worth another EUR1.8 billion.

But the sale of T&D alone "shouldn't be sufficient to ensure a healthy balance sheet, which is crucial to underpinning customer confidence given the long-term nature of the nuclear business," de Bray stressed.

Under the firm direction of French President Nicolas Sarkozy's government, Areva is planning a capital increase reserved to industrial investors and possibly foreign funds, that will open up around 15% of its capital. After the issue, the government's stake would fall to around 77%.

Lauvergeon has called on the government to sell 30% of the company through a public offering.

And the advent of the global economic crisis may just help her out, according to CM-CIC's Lambert de Diesbach, as the cash-strapped government itself is faced with the need to fund its economic recovery and rising social welfare costs. The more the government sells, the more independent Areva -and its strong-willed chief executive- could become.

Meantime, Areva is considering selling its 26.08% stake in French nickel producer Eramet SA (ERA.FR) and its 11.36% in Swiss-based semiconductor maker STMicroelectronics (STM).

No timetable for such cash-raising operations has been set. But according to a person familiar with the matter, the share sale could take place late March or April next year.

Areva declined to comment.

Formed from the merger -masterminded by Lauvergon- of several publicly owned nuclear sector entities in 2001, the company has come under criticism and faces some questioning about its role in France's nuclear ambitions and whether it is suited in its current form to cement a role as the world's leading nuclear engineering group.

The French government has appointed an ad-hoc working group, headed by former EDF CEO Francois Roussely, to think about the nuclear industry's -and Areva's- prospects.

Henri Proglio, the outspoken and politically influential new chief executive of EDF, the world's largest operator of nuclear power plants, earlier this month suggested Areva should be dismantled, with State-controlled EDF absorbing its nuclear assets.

- By Geraldine Amiel, Dow Jones Newswires; +331 40171740; geraldine.amiel@dowjones.com;

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