France Telecom is in a difficult situation. In many ways, it would do well to buy the German mobile operator, getting rid of its troublesome chairman and gaining full control over its investment. But the French telco’s debt problems are too serious for this to be viable at the moment. Instead, it must hope the incoming government changes the law so it can issue new equity.
Mobilcom’s chairman has revealed he can force France Telecom to buy 14.3% of the company from him.
Gerard Schmid, the chairman of German mobile operator Mobilcom, has revealed that he has a ‘put’ option to force France Telecom to buy 14.3% of the company from him. If the French group does not give sufficient financial support to building Mobilcom’s 3G business, Mr Schmid can exercise the option at any time.
This was a counter to France Telecom’s statement last week that it is not obliged to finance Mobilcom’s business plan, describing its expected levels of investment as irresponsible. At present, Mr Schmid owns 43% of Mobilcom, while France Telecom owns 28.5%. The French telco also has an option to buy Mr Schmid’s entire stake.
The problem is debt. Last week, France Telecom came bottom in a BNP Paribas analysis of 300 European companies, meaning the bank considers it has the most worrying debt relative to equity and earnings of any European firm.
To avoid distressing its bondholders and shareholders still further, it is trying to avoid any unnecessary spending. However, this seems not to be an option. Either France Telecom must spend enough money to placate Mr Schmid, or it must spend money on buying his stake.
So what can France Telecom do now? In many ways, a full bid for Mobilcom would be good. France Telecom would gain full control over its large German investment, ending troublesome strategy disputes with Mr Schmid. It would be able to rebrand the unit under its strong Orange brand, which would help with customer acquisition and retention in what is certain to be a difficult market.
This would sabotage the company’s debt reduction plans – but there could be a solution. At the moment, French law prohibits the government’s France Telecom stake falling below 50%. The new government, due for election on May 5, may have to choose between repealing this law to allow the telco to issue new equity and cut its debt problems, or watching its ‘national champion’ hamstrung by an inability to raise money.