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Last Updated: Tuesday, 5 August, 2003, 21:25 GMT 22:25 UK
France warned on 'illegal' Alstom aid
Alstom 'tilting' train
High speed trains are an important part of Alstom's business
The European Commission has fired a warning shot at France over its plan to bail out crippled engineering giant Alstom.

The French government is expected to inject 300 million euros (211m; $339m) into the flagship firm in an effort to save it from collapse.

But the EC has said the plan would constitute illegal state aid.

Under EU competition laws, member countries are banned from pouring taxpayers' money into companies that have run into trouble.

Economic system

Alstom is saddled with a 4.9bn euro debt mountain and is in refinancing talks with its banks.

It's totally inconsistent with what the government tells us the rest of the time, but it's not surprising
Economist at merchant bank
Shares in the group, which was once the pride of French heavy industry, have lost 90% of their value in two years.

The French government is reported to be concerned its collapse could threaten France's economic system.

It wants to take a 30% stake in Alstom via a rights issue, in an effort to buy the company some time.

French business newspaper Les Echos said Alstom and its banks had also won a promise from the government to guarantee bonds provided by Alstom for a total of 3.5 billion euros.

A deal between Alstom and its 40 creditor banks was reported to be close to completion on Tuesday evening, with an announcement expected at about 0630GMT on Wednesday, before Paris's stock markets open.

Trading in Alstom shares has been suspended since Monday.

Details demanded

The French government has been told its involvement in any deal will come under intense scrutiny from EC competition authorities.

The EC has questioned whether a private firm would invest so heavily in Alstom in the current circumstances - a key test of whether it would break state aid rules.

EU Competition Commissioner Mario Monti told French Finance Minister Francis Mer he expected France to hand over details of planned state investment in Alstom for closer scrutiny.

Mr Mer promised to notify Brussels soon with details of government plans to invest in the company, a spokesman for Mr Monti said.

Assets sold-off

In recent months Alstom has sold off key parts of its business - including its industrial turbines business and its transmission and distribution division, as it battles to reduce its debts.

It recently announced plans to stop UK train production at its Birmingham factory, with the loss of up to 1,400 jobs.

Chief executive Patrick Kron, who took charge in March, has said he will strip the company back to its core power generation and transport divisions.

But some analysts believe even this course of action is unlikely to secure the long-term future of the group as a stand-alone company.

Serious problems

Alstom employs about 110,000 people worldwide, including 75,000 throughout Europe.

It builds power turbines and transmission equipment, ships and France's high-speed TGV trains.

Alstom hit serious problems after it acquired power generation interests from competitor ABB in 1999.

It also compensation liabilities because two models of turbines were unable to provide customers with guaranteed power output.

'Not surprising'

The French government's decision to get involved in the refinancing of Alstom has met criticism from some market watchers and has been dubbed a "de facto re-nationalisation".

"It's totally inconsistent with what the government tells us the rest of the time, but it's not surprising," one economist at an investment bank told Reuters.

"It's a huge company, huge in terms of employment and huge in industrial terms - so it's too big to let fall."

A finance ministry spokesman said it was working with Alstom to reach a refinancing deal with its lending banks.

The state's involvement in a recent and far bigger financial restructuring at France Telecom was defended by the government on the grounds that it was acting like any hard-nosed investor, to protect its investment.

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