President Macron announced his will to conduct meaningful reforms which could have a significant positive impact on the economy and the French M&A market.
His electoral program lays out ideas to simplify the legal framework for entrepreneurs and small companies, reorganize unemployment benefits systems, introduce additional flexibility in the French labor laws and reduce the tax rates and social charges for corporations. In addition, President Macron announced changes in the investor role of the French State.
French Labor Laws
Among all these envisaged reforms, the amendment of French labor laws has been identified as a key priority and the new government has already started consultation proceedings with trade union representatives for employees and employers.
The current legal framework is considered by many investors as too complex and cumbersome and, given the existence of dismissal rules seen as very employee friendly, it often deters employers from hiring. To solve these issues, the proposed reform has three main components: giving more power to company-wide collective bargaining agreements, simplifying employee representative bodies by merging all the different types of committees into a single body with extended powers, and setting the amount of indemnities to be awarded by courts in case of unfair termination. These reforms aim at giving companies more flexibility to negotiate work organization in order to match their specific needs and at making the labor law framework simpler and more predictable for employers.
Another area for economic reform is tax regulations and especially tax rates.
By 2018, dividends, capital gains on securities and interest are expected to be subject to a flat tax of circa 30% (no precise figure has been announced). This flat tax should be “all inclusive” and would further include social security contributions. This is a significant change as compared to the current tax treatment, which resulted from former President Hollande’s tax policy. During the 2012 presidential campaign, President Hollande committed that investment income (including dividends and capital gains) would be taxed as salary. As a result, the marginal tax rate on investment income is currently 63.5% (including 15.5% for social contributions).
President Macron also announced a significant change in the wealth tax. The scope of this tax currently includes financial investment in companies, such as securities. President Macron announced that the wealth tax would now be limited to real estate assets.
No further details on these awaited measures have been provided at this stage.
Role of the French State
Lastly, disposals by the French State are expected to increase in the coming months. President Macron announced during his campaign his plan to create a €10 billion fund for strategy and innovation. He reiterated this promise during the Viva Tech forum (the French equivalent of the CES) that took place between June 15 and June 19. According to the latest declarations of the President, this fund will be managed by Bpifrance and will be principally funded through dividends received by the French State and through the proceeds of the sale of some of the French State’s minority investments.
Although no official announcements have been made regarding potential disposals for now, President Macron made no secret while he was finance minister from 2014 to 2016 that he was open to disposal where State shareholding is not justified. In 2016 alone, the sale of Bpifrance’s participations in large or intermediate companies resulted in proceeds amounting to close to €1.7 billion. In line with this trend, disposal of minority participations in listed companies (for instance Orange or Peugeot) might be contemplated in the future, either by way of offering on the market or direct transfer to investors.
In addition, in the wake of the recent disposals of the Toulouse (announced in 2014), Nice and Lyon (announced in 2016) airports, other infrastructure assets (including the minority block held in Aéroport de Paris) might also be sold by the French State.
At the European level, President Macron's goal is to relaunch and to strengthen economic cooperation in the Eurozone. In this respect, President Macron symbolically paid his first international visit to Chancellor Merkel. The new government includes several people with a deep knowledge of Germany, which will help enhance the collaboration between Paris and Berlin.
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The objective of all the proposed reforms is to increase consumer confidence and to boost the economy and the creation of new jobs and new companies. If these reforms succeed, they will directly benefit portfolio companies in their day to day business and in their growth strategy (either by capex or by acquisitions). In this context, French National Statistical Institute (INSEE) announced on June 20, 2017 that French GNP’s annual growth for 2017 should be 1.6% whereas the IMF and the European Commission had forecast a 1.4% annual growth.
Macron’s election has already been welcomed by the stock exchange market -- the French reference index (CAC40) has increased by 4.6% since the first round of the French presidential elections. This is good news for PE funds considering an exit through an IPO!