Charles Gave of Evergreen/Gavekal penned a not-so tongue-in-cheek missive last week titled “Will The Last Businessman To Leave France Turn Out The Lights?”. Gave castigates the French government in his Global Update of May 7th, claiming it is decimating French business. “In France, it is almost impossible for a normal business to make a decent return. The gross operating margins of French companies operating in France have fallen to a 40-year low.”
French business: Flight out of France
The business climate is so bad in France right now, Gave argues, that larger businesses are literally fleeing the country. Gave mentions several recent examples such as In 2012, when ArcelorMittal SA (ADR) (NYSE:MT) (AMS:MT) closing blast furnaces in France in 2012, advertising giant Publicis Groupe S.A. (ADR) (OTCMKTS:PUBGY) (EPA:PUB) moving its new holding company headquarters to the Netherlands, joining Renault-Nissan, who also relocated to more business-friendly Netherlands several years ago. just last month, the French cement firm Lafarge S.A. (EPA:LG) (OTCMKTS:LFRGY) was acquired by its Swiss competitor Holcim Ltd (ADR) (OTCMKTS:HCMLY) (VTX:HOLN) and the corporate headquarters of the new group will be in Zurich, one of the most expensive cities in the world.
Businessmen leaving France
Not surprisingly, businessmen and future entrepreneurs are leaving France along with their businesses. Gave highlights the problem in stark terms. “In my youth, most of the well educated French businessmen spoke very little or no English, and could not imagine living outside France. Today, most of them do speak English, and they have one dream: get the hell out of France. It’s a dream shared by most young graduates from good schools. Half or more leave France immediately after graduation.”
French business: Poor climate for investment
Gave also points out that a poor French business climate also creates a poor investment climate, forming a economically self-destructive cycle. As he points out, you “would have to be an idiot” to consider investing in France right now. Not only is return on capital is lower than in Germany, and the cost of capital is also significantly higher.
In concluding, Gave somewhat ironically suggests French-headquartered are actually a good investment in this climate, but only because they are likely takeover targets. “But you would be very smart to buy French companies that have already moved most of their production out of France but which have ill-advisedly maintained their headquarters in Paris. They are obvious targets for takeover bids.”