Areva alleges an unholy partnership

In November last year Siemens gave notice that it was pulling out of the Areva NP joint venture that the two had set up to pool their nuclear activities, and in February this year recommenced talks with Rosatom that had been officially dormant since 2007 when the two companies signed an MoU for future co-operation.

Siemens directors had started increasingly to feel that the group’s ambitions in the nuclear area would be curtailed by their commitment to the venture. Accordingly Siemens decided to sell its 34 % stake in Areva NP owing to ‘the lack of strategic influence that it had in the partnership’ and its desire to pursue its own growth plans for the nuclear market.

The split became irrevocable on 3 March this year when only a month after formal talks got under way between the two firms, Siemens and Rosatom followed up their discussions by signing a new MoU on the creation of a nuclear joint venture. They believe that the move will help them to capitalise on the resurgent world nuclear market, and aim to become world leaders in the international nuclear power business. They are a good business fit and have undertaken to keep out of the politically sensitive areas of fuel reprocessing and uranium enrichment. Under the terms of their original agreement Siemens must now offer all its shares to Areva.

Areva has reacted to the MoU by alleging that as the new company would be competing with Areva in building reactors and supplying fuel, Siemens had unilaterally breached its contract by going into direct competition so soon against its former partner. Areva issued a statement on 4 March to this effect, and warned of consequences related to a no-competition clause in the Areva NP shareholders’ agreement that forbids Siemens from competing with Areva NP for eight years after any split, in businesses it contributed to the joint venture. It had, it said, ignored the earlier announcements because they concerned engineering areas that did not conflict with its own interests, but the joint company’s announcement that it was going after 30% of the world nuclear market, the same figure quoted by Areva, amounted to a direct attack.

Joint venture

The MoU envisages a joint venture in which Rosatom holds 50 per cent plus one share. The Russian firm is probably the only company in the world that covers the entire nuclear value chain and the partnership potentially gives Siemens access to a wide range of business opportunities. Both Areva NP and the new venture are aiming at 30% of the world market.

The proposed company will initially focus on the development of Russian VVER reactor technology as well as marketing, sales, new plant construction and the upgrade and modernisation of existing nuclear plants. Siemens brings to the partnership extensive knowledge of the conventional islands of nuclear power plants as well as project management experience.

The deal is expected to be finalised in May, incorporated by year end and in a position to sign contracts in 2010. Ultimately it will also give Siemens direct access to the Russian market, which is expected to undergo considerable expansion during the next couple of decades. Russia wants to boost nuclear energy to about 25 % of total electricity generation over the next 20 years from 16 % currently. Prime minister Putin has said that to achieve this at least two reactors each year must be built and has approved a large scale consolidation of the state-controlled atomic sector.

World nuclear business

Siemens forecasts that by 2030 some 400 new nuclear power plants will have been built world wide, representing a total investment of more than r1000 billion, and believes the deal will help it to fight off competition from GE and Toshiba-owned Westinghouse.

It will also be competing directly with Areva in building reactors and supplying fuel, a prospect that is at the heart of the dispute between the two future ex-partners. Siemens and Rosatom had issued a conciliatory statement that the ambitions of the joint venture will lie in markets outside Russia and Germany. Areas mentioned are eastern Europe, Asia, the Middle East and Africa. That the deal is with Rosatom, and not its industrial subsidiary Atomenergoprom, does signal that the partnership is strategic on nature. The structure of the new company and what assets each partner will bring to it will be determine by future negotiations. Siemens brings its expertise in areas such as turbines, generators and operating systems, and wants to gain exposure to Rosatom's involvement in the whole nuclear fuel chain. But there is no question, says Kirienko, of nuclear technology transfer to Siemens. The new company will develop its own technology.

It may also be significant that this is the first such deal by Rosatom itself, previous partnerships (such as the Alstom Atomenergomash joint venture to build Alstom design steam turbines at Podolsk) having been carried out by its industrial subsidiaries. There is some sensitivity too about treading carefully in order to avoid conflicting interests with other potential partnerships such as that between Atomenergoprom and Toshiba, so far only an MOU of March 2008 that has yet to produce concrete results. The nuclear world is getting close to the point where the tracery of international agreements between companies that compete in different but dangerously adjacent areas (others include those between GE and Toshiba (turbines), and Rosatom’s with Alstom) is becoming so complex that there is a danger of tying legal knots that may never be unravelled.

Nonetheless, with Rosatom as the only company in the world whose competence includes the entire range of nuclear power activity the scope of the new company will be wide, taking in turnkey power station construction, fuel supply, balance of plant including boilers and generators, and pre-start up services. It has been hinted that mining activities could be included at a later stage.

Completion of the deal with Rosatom will put pressure on Siemens and Areva to complete their split. The two companies have, in theory, three years to finalise the sale of Siemens shares in Areva NP, but competition issues may now require this to be wrapped up quickly. An interesting sidelight on the whole issue is Kirienko’s contention that French president Nicolas Sarkozy had in 2007 called for a nuclear strategic rapprochment between Russia and France and that subsequent approaches initiated by Kirienko to Areva had been rebuffed by its CEO Anne Lauvergeon. The tone of this account is denied by Areva spokespeople, but it is undeniable that Areva officials have been sceptical about co-operation with a direct competitor.

Consequences

The strength of Siemens’ position lies in Areva’s perceived weakness – the r2.05 bn value of Siemens’ stake would inflate Areva’s current net indebtedness to r5.5 bn, endangering its huge re-investment programme.

If the material breach alleged by Areva is proved, it would give it the right to buy Siemens shares at 60% of their market value. However, neither side is keen at this stage to go to arbitration or litigaton unless the issues involved, such as the present value of Areva NP assets and the conditions of Siemens departure, cannot be resolved by negotiation. Areva believes its position, although by no means rock-solid because Siemens is not prohibited by its Areva NP contract from buying stakes in other companies, is strong enough to enter those negotiations with confidence.

When Siemens joined Areva NP it gave up its nuclear technology and all its patents, in particular the safety-related version of its Teleperm XP I&C technology, to the joint venture. It cannot reconstruct it without its patents and cannot now recover it except by negotiation. It may be that it can offer a reduction of Areva’s financial burden in exchange for this technology and a shorter no-competition period.

OVERMATTER

‘The progress made in the talks shows that we really understand each other well by virtue of our experiences in joint activities and projects’ said Sergey Kirienko, general director of Rosatom. ‘In a fully fledged partnership with Siemens we want to become the world market leader in the nuclear power business. I am looking forward to soon making next successful steps in our negotiations.’

allowing the two companies to move forward with their global plans.