The Secretive French Agency Blindsiding Global Investors

Ania Nussbaum and William Horobin
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(Bloomberg) -- “Choose France,” President Emmanuel Macron tells the investors he gathers each year to the Palace of Versailles.

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So last year Flowserve Corp. was surprised to find its investment plans blocked by the French state itself.

The Texas-based company, which makes parts for industrial machinery, was trying to buy a Canadian group with an offshoot in France while Macron — a former investment banker — is redoubling efforts to attract foreign capital and spur an industrial renaissance.

But watching over the negotiations was a secretive government agency that’s become more and more activist about frustrating business deals in the name of national security. While the US company was still working on its acquisition, the agency known by its French acronym Sisse quietly sprung into action.

It recommended the state seek out alternative, local buyers for the factories which make equipment used in submarines and nuclear reactors. Later, Finance Minister Bruno Le Maire blocked the takeover on grounds that transferring ownership from one North American-owned company to another was too great a risk to French economic sovereignty.

The intervention, first reported by Bloomberg News, has shed light on the opaque workings of Sisse, which has power to advise either that the French government waves through takeovers — or that it kills them. Cloistered in an outer wing of France’s sprawling Treasury, Sisse’s officials have seen a sustained increase in their workload in recent years as they pursue a remit to “detect, categorize and handle” any perceived threat to the country’s strategic assets.

Their mission takes inspiration from the mechanisms others like the US use to protect their economic interests — but it also works against them, exacerbating a climate of economic protectionism that has spurred countries to trade with a closer eye on geopolitics.

France has long sought to exercise its protectionist muscles, annoying competitors and even its more liberal EU allies with policies designed to put French interests first. After both Covid and Russia’s war in Ukraine caused a rethink of supply chains across the western world, those impulses found an opportunity.

Three years ago Le Maire rebuffed a $20 billion takeover bid from another Canadian company, Alimentation Couche-Tard Inc., that was proposing to buy supermarket chain Carrefour SA, citing food security issues that became paramount during the pandemic. At the same time, France watched its European neighbors shift their energy mix away from the Russian sources on which the they used so heavily to rely.

Sisse’s intervention into the Flowserve deal shows these concerns at work, as the country races to repair its ageing nuclear power plants with new parts. Yet the agency’s domain is even wider, spanning sectors like transport, biotechnology, artificial intelligence and defense, according to people familiar with its operations, who asked not to be named because Sisse doesn’t make its activities public. Most of the threats the agency considers stem from the US and China, they said.

The pandemic was a turning point for France’s economy in another way: As valuations tumbled after the economy went into lockdown, foreign investors with deep pockets began to eye struggling French firms. Macron responded with a temporary toughening of rules to screen investments, which has since been made permanent. When he was reelected in 2022, the president underscored the shift in priorities by changing his finance minister’s responsibilities to add “industrial and digital sovereignty.”

Although Le Maire’s future is uncertain while Macron reshuffles his team ahead of European elections, there’s no indication that the job description of his successor will change — and he may very well keep his job.

The Treasury’s heightened vigilance sits uneasily with regular boasts from the government that Macron has turned France into a hotbed for inward investment, propelling it past Germany and the UK to top rankings for attracting projects financed by foreigners. But for watchful French officials, their companies’ popularity with investors has risks. The number of dossiers Sisse reviews has almost tripled in as many years.

Interest rates that rose through much of last year have weakened indebted companies, making them less likely to seek traditional bank financing and pushing them “instead to look for equity, potentially relying more on foreign investors,” according to Sarah Guillou, economist at the OFCE think tank.

Many officials in Paris, including Le Maire, say the broader challenge is that Europe is becoming a collateral victim of the race for technological advantage between the US and China. “Global geopolitics has become tougher,” Sisse’s chief Joffrey Celestin-Urbain told Bloomberg News. “These macroeconomic tensions give rise to microeconomic alerts.”

In that climate, his agency has become the first clearing house for many foreign investors into France — whether they know it or not. Sisse can flag acquisition attempts it thinks pose a high risk of being scuppered were they to advance to a more formal screening process in which the finance minister acts as arbiter. That makes its principal weapon dissuasion. Any company that doesn’t follow Sisse’s guidelines is at greater risk of disappointment further down the line.

Flowserve ultimately gave up on the entire plan of acquiring Velan, whose French businesses represented just a quarter of a deal worth almost $250 million. Flowserve declined to comment on Sisse’s role in the prelude to the minister’s blocking its acquisition attempt. Velan didn’t return a request for comment.

A person familiar with the French government’s thinking said any foreign investor would be subjected to the same level of screening. Paris authorities are not aware of another plan to sell the units.

In order to stand a chance on sensitive acquisitions, foreign firms are increasingly approaching Sisse themselves, according to people familiar with its workings, as they look to shape deals in hope of subsequent approvals. Firms or individuals are now filing thousands of reports every year on a confidential basis, and Celestin-Urbain says his team responds to each one individually.

In the case of an unwanted takeover or investment, Sisse’s direct tools are limited. It is often a case of looking for alternative French buyers, like the state-backed Fonds France Nucleaire or Bpifrance, or setting conditions on any financing from the French state. Still, “we aren’t the Tinder for funding French strategic companies,” Celestin-Urbain said on the social-media platform X.

As well as reviewing sensitive investments and acquisitions, the Sisse agents — who number close to 50 — have a responsibility for monitoring legal actions in France and abroad, and keeping an eye out for potential academic espionage, wherein fake PhD students join university programs to gain access to sensitive research.

Sisse’s meeting rooms in the vast brutalist building on the right bank of the Seine are as austere as any other government office. Yet they reflect the competing imperatives to impress foreign adversaries and protect Europe’s second-largest economy from them.

Officials sit on antique chairs upholstered with velvet and brought in from the Louvre, where the finance ministry was located until the end of the 1980s. A statue of Louis XIV’s finance minister Jean-Baptiste Colbert, the famous mercantilist, reminds visitors of a doctrinal legacy that bends the economy toward the aims of the state.

Celestin-Urbain says his actions reassure investors by guiding them and giving them visibility — sometimes saving months of due diligence and legal fees. Still, French authorities can find themselves in a bind when having to chose between overtures from foreigners or watching a company close because it cannot find local investors.

“Today, nobody can continue to ignore the sovereignty parameter when buying companies in strategic sectors,” Celestin-Urbain said. “We aim as much as possible to ensure economic security without destroying value or restricting the freedom to do business.”

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