The French government has endorsed Areva SA's (CEI.FR) model of providing utilities with a full cycle of nuclear services, but it has made clear that its ambitions for the overstretched nuclear champion mean Areva may have to sell other assets and raise extra funds by bringing in an industrial partner.
Representatives of the French state, which holds 91% of Areva through a number of its agencies, will attend a June 30 meeting of Areva's supervisory board. The company has confirmed the date of the meeting, and analysts and press reports suggest it is decision time.
Areva's form as a provider of nuclear services from fuels to reactors is the one the government now says it favors, after two years of deliberations that sparked speculation about other solutions, such as a tie-up with French industrial peer Alstom SA (ALO.FR).
The financial limits Areva is already coming up against, however, and the government's plan for it to expand aggressively and export French technology, mean the decision is likely to be that Areva will sell its power grid equipment business and possibly launch a capital increase.
The resurgence in nuclear power around the world is "dazzling" and it would be a "grave mistake" for Areva to be behind with investment, President Nicolas Sarkozy said during a recent visit to a nuclear reactor construction site. Sarkozy went on to stress the need to invest "rapidly and massively without hesitation or reservation."
But the president also had plenty of praise for what the company is already doing, and for its model of being present right across the nuclear cycle. That model, he said, guarantees clients one-stop access to uranium fuel, reactor technology and solutions for dealing with radioactive waste.
The president has said he wants to help give poorer nations access to civil nuclear technology, and sees Areva as a champion that can help countries develop civil nuclear power without embarking on the politically sensitive path of enriching their own uranium.
Areva is also very focused on the model. "There is no point for utilities in buying a nuclear plant if they are not sure they can rely on someone to provide them, in the long term, with fuel," Sebastien de Montessus, Areva's head of mining, told Dow Jones Newswires in a recent interview.
Indeed, a broad consensus among the government, the company and market observers has emerged that the full-cycle nuclear model is essential to Areva's future.
"I think it's the only model that can work," said Alex Barnett, a Paris-based analyst at investment bank Jefferies, referring to Areva's complete range of nuclear services.
Areva, he said, has been "extremely competitive" on price to implant its flagship reactor design, the EPR, as widely as possible, adding: "They need something else to make money."
The model's future hasn't always seemed as safe. A much-speculated tie-up with turbine- and train- company Alstom SA (ALO.FR) could, for instance, have mixed the nuclear units into a more jumbled capital goods business.
But that option, which Areva Chief Executive Anne Lauvergeon opposed as lacking industrial logic, now seems unlikely to transpire. And Alstom Chief Executive Patrick Kron has recently said it isn't on the agenda at the moment.
The government is keen to find a solution very soon, after two years of pondering the issue. May 19, Prime Minister Francois Fillon told lawmakers the government would decide "in the coming weeks on the terms of the financing of this strategic priority."
The need to find a solution is all the more pressing given Siemens AG's (SIE.XE) decision in January to sell a stake in Areva's nuclear reactors division back to the French company. In its 2007 reference document, Areva valued the 34% stake at EUR2.05 billion, and the company is currently working on a final price with Siemens.
Beyond that, Areva already has a lot of investment in the pipeline. According to its Web site, Areva estimates capital expenditure will average around EUR2.2 billion a year between 2008 and 2012, excluding acquisitions.
"They are doing a lot of outsourcing of the component building" for reactors, Barnett said. But while Areva is building the business around reactors, enrichment facilities, uranium mines and recycling activities are the main areas in which it needs to invest in coming years, he added.
While Sarkozy wants Areva to think big, France's bulging overdraft means he can't afford to splurge.
His government, which has been considering how to turbo-charge Areva since it came to office in 2007, has said it should focus on its nuclear business, a strong hint that it will have to sell its power grid business and maybe also the minority stakes Areva still holds in other companies.
Meanwhile, Sarkozy has suggested that allowing other industrial companies to invest in Areva is another way to add muscle to the nuclear group. In a recent speech, he said his government was studying "industrial partnerships" that could help Areva achieve the ambitions he has for the company.
But while the government may go for a limited capital increase, the state atomic energy agency, which owns 79% of Areva, is reluctant to see its stake in the company diluted, and there also are fears about floating shares in the current market conditions, according to a government official who spoke on condition of anonymity.
Still, Mitsubishi Heavy Industries (7011.TO), which has a partnership with Areva to design a new medium-sized nuclear reactor, said Friday that it will consider taking a stake if the French government offers it the chance.
The comment came after the Financial Times reported the French government is preparing to sell up to 15% of Areva to strategic partners, possibly including Mitsubishi, to raise around EUR2 billion to fund the company's development. The FT reported that Areva will also sell its T&D unit.
With Siemens now looking at a potential alliance with Russia's Rosatom, consolidating the alliance with Mitsubishi could mirror that potential partnership.
Either way, the future for the company as a full-cycle nuclear group now seems assured.
"Areva is the only single-solution company," said Ben Elias, an analyst at brokerage Sterne Agee in New York. "You want to get into the nuclear game? You've got to go to Areva."