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France Piqued as Foreigners Decide Bank Takeover

Investors in a vicious three-way bank battle are hampering the government's search for a French solution.

French authorities have made no secret of their desire for a "French solution" to the ugly takeover battle between Banque Nationale de Paris, Societe Generale (SCGLY) and Paribas (PARI) . Yet the reality is that foreigners, not the French, will be the ultimate arbiters of this war of banks.

If anyone doubted this, consider Tuesday's decision by the French stock regulator

Commission des Operations de Bourse

, or COB, to freeze the voting rights of 3.6 million SocGen shares bought by British insurer


last week.

The COB explained that, because CGU bought the shares off-market, the insurer breached a 1967 law that forbids any trade in a unregulated market during an offer period. As such, the COB had no option but freezing the voting rights of the shares until August 26, when it would make a ruling on the legality of the purchase.

This action, as well as being highly embarrassing to all involved, may ultimately swing the balance in favor of BNP's bid for SocGen and Paribas, which will be decided on Friday when the deadline to tender shares expires.

This is because CGU supports SocGen in its friendly merger attempt with Paribas, and it would have used these voting rights to fend off the hostile double takeover of the two banks by BNP. However, those votes now won't be going to anyone, meaning SocGen has lost some valuable support in a fight that is expected to be close.

Choosing Sides

CGU's attempt to increase its stake in SocGen to 7% from 3.1% is only one in series of such moves that have taken place since the fight between the three banks began in March.

On Tuesday,

Banco Santander Central Hispano


, another of SocGen's allies and Spain's largest bank, revealed that it had increased its stake SocGen to 4.08% from 3.34%. The legality of this may also now be in doubt after COB's ruling. Germany's

Dresdner Bank


confirmed last week it had bought more shares in BNP.

"Ironically, it does look as though foreigners will decide the outcome of all this," sighs Sarah Manton, an analyst at


, who says if she were a shareholder she would support BNP's bid. HSBC has no investment banking relationship with any of the banks.

The Lay of the Land

So where does all this maneuvering leave the two sides? Very much in the hands of institutions, both foreign and domestic; only 11% to 13% of the shares in the three banks are held by retail investors.

Already the fight for foreign institutional investors has been hard-fought and high-profile. Earlier in the week, SocGen and Paribas took out a pair of full-page ads in

The Wall Street Journal

urging investors to vote against BNP.

And as the marathon battle winds toward a climax, both sides are proclaiming victory, though it looks likes BNP is well placed to gain control of Paribas.

Beniot Vincenzi, an analyst at

Fox-Pitt Kelton

, a division of

Swiss RE

which backs the BNP bid, explains that the capital structure of Paribas is dominated by financially driven shareholders, who have "shown greater support for BNP's management than for SG's."

Assuming 70% of the institutional shareholders tender their shares to BNP and the retail investors are evenly split, BNP would gain 59% of Paribas's capital, Vincenzi says.

Whether BNP can gain control of SocGen is another matter entirely. Jean Baptiste Bellon, analyst at

Deutsche Bank

, which has no investment banking relationship with any of the banks, believes the most likely outcome is that SocGen will remain independent.

Yet Fox-Pitt Kelton's Vincenzi believes that BNP will gain at least 35% of SocGen's voting rights, which could be enough if the unanimity of SocGen's board fractures at the next annual general meeting.

HSBC's Manton points out that the share tender is only the first stage of a war that will spill over into that meeting, where the suspended voting rights of CGU's shares may come into play again.

While the mask of a French solution to the three-way merger battle may be slipping as the power of foreign interest becomes apparent, there may be some consolation for the French in all this. The U.K. has yet to enjoy the spectacle of hostile takeover for a bank and, says Manton, "the French can now say they are showing the Anglo-Saxons how it is done."

C'est vrai