THUNK!!!

The guillotine hovering over Mobilcom AG stopped just short of its neck today. But, whichever way you cut it, the German operator's grand plans for rolling out UMTS in its home market seem likely to get the chop.

Major shareholder France Telecom SA has managed to get the banks that are clamoring to be repaid the €4.6 billion Mobilcom owes them to agree to a new September 30 deadline (the US$ are roughly equivalent to the € at the moment). In the meantime, the French operator is trying to hammer out a deal that will satisfy the banks and give it control of Mobilcom (see MobilCom Banks Will Sell Loans).

If the banks agree to the proposed deal -- and that is by no means certain -- they will effectively take France Telecom stock in return for their money. If France Telecom does gain control of Mobilcom then it could follow in the footsteps of Telefònica Moviles SA and Sonera Corp. (Nasdaq: SNRA), which last week canned their UMTS venture in Germany, Group 3G, because it was costing too much (see German 3G Player Folds).

Philip Crate, an analyst at Bear Stearns & Co. Inc. in London believes that the German UMTS market is a "bottomless pit" and that if France Telecom takes full control of Mobilcom, "one option is to turn the lights out and hold onto the license until they see what the regulator is going to do." There are no UMTS network build-out requirements to be met until the end of 2003, so France Telecom could quite painlessly go down this route. Crate believes that they should.

How did France Telecom get itself into this cul-de-sac in the first place? It all started with a row over the amount that France Telecom should sink into Mobilcom's UMTS development and turned into a question of who owns the reseller.

According to MobilCom, France Telecom, which holds a 28.5 percent stake in the venture, was required to give it all the money it wanted to launch UMTS. France Telecom's note to the U.S. Securities and Exchange Commission (SEC) on its commitments to Mobilcom -- which Mobilcom gleefully published -- states:

This does sound a bit ominous, but wait -- it gets worse.

Mobilcom adds that France Telecom failed, in the SEC filing, to mention any upper limit on this commitment. It seems that France Telecom also left itself wide open on the conditions of the financing, which sounds too remiss to be true.

France Telecom's side of the story is that its "cooperation framework agreement" (CFM) with Mobilcom did bind it to providing financial support to Mobilcom for UMTS, but is also dependent on the two reaching agreement on "fundamental matters." One of which is the minor detail of the business plan.

Gerhard Schmid, the former CEO of Mobilcom, had wanted to roll out UMTS in grand style, around €7 billion worth. This was something France Telecom -- with around €70 billion in debt -- was, unsurprisingly, not willing to back. Luckily for FT, the CFM also apparently states that if there is disagreement between MobilCom and France Telecom on a "fundamental matter" and mediation doesn't work, France Telecom has the final say.

The state of play now is that agreement on France Telecom dealing with the €4.7 billion in debt depends on Mobilcom meeting a number of undisclosed conditions "to the satisfaction of France Telecom." You can almost see the pursed lips. France Telecom goes on to remark: "There is no certainty at this stage that the situation of Mobilcom can be resolved to the satisfaction of France Telecom." (See MobilCom Losses Spiral and French Snub Mr. Schmid.)

However, an observer close to the deal has said that if France Telecom could have just walked away from its shareholder agreement with Mobilcom it would have done so by now.That said, being forced to abide by this agreement does not mean that France Telecom will pump a lot of money into Mobilcom.While analysts do believe that France Telecom will buy out all the minority shareholders, just to spare itself hassle (and under German law it may have to if it takes control), they also think that it will not be willing to pay the €14.50 a share that Gerhard Schmid is demanding.

MobilCom would not comment on today's events, just stating that today's debt agreement is tied to a memorandum of understanding (MOU), between France Telecom and the banks, on a long-term financing solution for Mobilcom. No MOU -- not a sou.

Which sounds as if they hope to hang around. However, as Bear Stearns's Crate points out, if France Telecom had complete control of Mobilcom -- protecting it from claims by minority shareholders -- only the banks would be there to insist on this long-term funding.

The patch-up deal with the banks will see them take bonds convertible into FT stock in exchange for their money.These bonds, which have no maturity date and no cash redemption are, in essence, an equity issue, rather than fresh debt -- which avoids more blots on France Telecom's balance sheet.The bonds are subordinate to everything else in the way of FT debt, which suggests that being at the back of a queue for €71 billion is the best hope the banks can get of seeing their money again.

The strike price on the shares is €47. France Telecom stock is currently trading at around €15 a share.

— Ouida Taaffe, special to Unstrung
http://www.unstrung.com