Air France-KLM Tumbles Most Since Merger on Surprise Dutch Stake

(Bloomberg) -- Air France-KLM Group fell the most ever after the Dutch government’s surprise decision to buy a stake in the airline raised concern that competing national interests will derail Chief Executive Officer Ben Smith’s efforts to streamline the carrier.

The Netherlands purchased a 13 percent holding, a move aimed at gaining parity with influential shareholder France following a power clash that left the Dutch side of the partnership weakened. The stock dropped as much as 15 percent in Paris, the most since 2002, when it was just Air France. The current company was created two years later when the French flag carrier merged with its smaller Dutch counterpart.

“The Dutch stake does not make us more positive,” Bernstein analysts including Daniel Roeska said in note Wednesday. “We worry that national, diverging interests will slow the group down in its much-needed restructuring.”

KLM and Schiphol Airport in Amsterdam are of great importance to the economy and employment, Dutch Finance Minister Wopke Hoekstra told reporters late Tuesday after announcing the investment. He said the government was concerned that decisions on KLM’s strategy more frequently were being made at the level of Air France-KLM’s Paris-based holding company.

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“There was simply too little influence from the state in KLM to be able to look after the Dutch public interest well, and to make a success of KLM,” Hoekstra said. “This step shows our long-term commitment to the entire company.”

The shares traded 12 percent lower at 11.24 euros at 11:13 a.m. in Paris, giving Air France-KLM a market value of 4.82 billion euros ($5.5 billion).

Air France-KLM Tumbles Most Since Merger on Surprise Dutch Stake

New Twist

The move reignites tensions between the French and Dutch arms of Air France-KLM, just as pressure was easing from a crisis that threatened the job of KLM boss Pieter Elbers. The Dutch head stayed, but Smith gained a seat on KLM’s supervisory board and won a more streamlined power structure that sidelined some of the cumbersome committees that slowed decision making but ensured the Dutch side had some parity.

Hoekstra said the Dutch government, which held a 5.9 percent in the local KLM unit before the recent transactions, wants to reach parity with France, which holds a 14 percent stake in the holding company and as a long-term investor has extra voting rights that give it 23 percent of the vote.

The Netherlands’ group-level stake, which cost 680 million euros, will put the state in a position to ask for board seats at the next general meeting. It won’t qualify for extra voting rights for two years.

Air France-KLM’s board and the French government weren’t informed of the Dutch purchase in advance, French Finance Minister Bruno Le Maire told Les Echos on Tuesday. He said he reaffirmed his support for Air France-KLM management and said it is “essential to respect the principles of good government” without national interference.

Dutch Revolt

The threat of Elbers’ departure had triggered an outpouring of support in the Netherlands, where Hoekstra touted his achievements and hundreds of KLM employees demonstrated outside the headquarters to defend their boss. KLM went as far as hiring a public affairs adviser in Paris and launching the #BlueStormRising hashtag to support Elbers. Although Smith -- a Canadian brought in to ease strife among labor and the various stakeholders -- eventually decided to renew Elbers’ mandate, the tensions deepened the rift between the two partners.

Air France and KLM have been operating semi-independently since their merger through a complex arrangement that was meant to guarantee the Dutch government would keep a say in the companies and KLM would keep jobs and business in Amsterdam.

Smith, who took over in September after Elbers refused the job, has made clear he wants the units to operate more like a single company, a move that has been met with resistance from KLM managers and unions who say they fear Air France’s lower profits will drag down their company.

Emerging Nationalism

European governments have intervened more frequently recently in the affairs of major businesses -- countering a 40-year trend toward privatization -- in an effort to protect local champions and respond to the increasingly nationalistic trade policies of the world’s dominant economies, China and the U.S.

The French and German governments lobbied hard to save the rail merger of Alstom SA and Siemens AG’s train unit, which was blocked by the EU. Germany is also looking to orchestrate a merger to keep Deutsche Bank out of foreign hands, and France is looking to delist nuclear power company Electricite de France SA. In Italy, the government is increasing its stake in Telecom Italia SpA and bankrupt airline Alitalia.

For French President Emmanuel Macron, this is the second instance of an unexpected and not-so-friendly move on a French state-held company, after Renault leader Carlos Ghosn’s arrest in November in Japan. The French president, who has had a rocky start in his relationship with Dutch Prime Minister Mark Rutte, is discovering that another European leader can make a move straight out of the dirigiste playbook of Old France, sharpened into an art form by Louis XIV’s finance minster Jean-Baptiste Colbert in the 1600s.

“The Dutch state seems to be implementing the same methods as the French,” said Philippe Waechter, chief economist at Ostrum Asset Management. “The perception of this all is that there is no choice to have an influence over what is seen as strategic assets but to own parts or all of these assets."

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