French pledge revives Volvo deal: Government's share in merged group will not be used against Swedish partner, Balladur promises

THE FRENCH government has intervened to save the proposed merger between Renault and Volvo by promising not to use its golden share in the new company - as long as Volvo's stake does not exceed 35 per cent.

The government has also undertaken to sell its entire stake in the merged motor company as soon as market conditions permit, which it said could be in the second half of next year.

The guarantees are contained in a letter from Edouard Balladur, the French Prime Minister, to Carl Bildt, his counterpart in Sweden.

Mr Bildt had said previously that the proposed merger of the two companies' car and truck operations was unlikely to proceed without clarification of the golden share and privatisation issues.

He is believed to have intervened after an appeal from Volvo in the midst of mounting concern among shareholders over the planned deal.

Volvo shareholders had questioned the French government's commitment to privatisation.

Some have also been worried that the government might in future use the golden share to force Volvo to reduce its stake in the merged group.

Under the original terms France was able to use the golden share to cap any shareholder stake of more than 20 per cent once privatisation was complete.

Mr Balladur said: 'It (the golden share) will not be directed against Volvo insofar as the basic principle of the balance of share distribution in the new company is maintained.'

Publishing the letter from Mr Balladur, Mr Bildt said: 'I would, as Swedish Prime Minister with a similar task, not be able to go further.'

A spokesman for Volvo said: 'The latest development is extremely positive.'

He added that the promise not to use the golden share against Volvo would be included in the shareholders' written agreement so that it would continue to be valid under any future government in France.

Volvo also said that further work on the benefits of a merger showed that it could mean savings of Skr56bn ( pounds 4.6bn) up to the year 2000 compared with savings of Skr40bn from an alliance short of a full merger.

Now that all the demands of the Volvo shareholders have been met, Volvo's board believes they will back the Renault deal at an extraordinary meeting on 7 December.

Pehr Gyllenhammar, Volvo's chairman, said: 'I believe that shareholders, now they have this additional information, will vote through the proposal with a sound majority.'

Volvo and Renault plan to merge their vehicle operations in a new company on 1 January, with French interests controlling 65 per cent and Volvo the remainder.

The merger, creating one of Europe's largest automotive groups, is an important part of the French government's industrial policy, including the privatisation of about 20 state-owned companies.

The planned merger has also awakened public concern in Sweden over the path that Volvo has taken recently, building its interests beyond the car and truck business.

Some critics believe that if Volvo had not diversified - most recently into food, drink and medicines - it would not have needed to seek the relationship with Renault.

Despite the controversy over the deal, industry observers believe that it could become the first of a string of marriages between Europe's car groups. Renault and Volvo combined will have a turnover of pounds 27bn, a staff of 200,000 and sales of almost 2.5 million cars.

The merged group will have 12 per cent of the car market and about one-fifth of the truck market.

The first product of the merger will be seen next spring with the appearance of a new version of the Renault 21 based on a Volvo engine.

The companies stress that although there may be models from each using the same platforms and engines they will continue to market and distribute separately, retaining the Renault and Volvo identities and marques.