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September 13, 2002
It's Friday the 13th and the knives are out at France Telecom SA's Paris HQ.
SLASH! Chairman and CEO Michel Bon does the decent thing and turns the knife on himself, offering his resignation (see France Telecom Chief Quits). The board accepts, with Bon staying on until a successor is appointed, which should take about three weeks (or, in quaffing terms, about 21 crates of 2001 Beaujolais [BOE-zjoh-lay] Nouveau).
SLASH!! France Telecom cuts its ties with German mobile reseller MobilCom AG, leaving it high and dry. The German service provider, which has a 3G license (for which it paid $7.6 billion in August 2000 following an auction process), is now preparing to file for bankruptcy (see FT Dumps MobilCom). It will no doubt find some cash for lawyers' fees, however, as it plans to sue France Telecom for damages. Another reminder that Unstrung's granny was right when she said that every day is pay day for the legal profession, no matter what the state of the economy. She's a wise old stick, granny.
SLASH!!! Red ink spews forth as the French telco's bottom line takes an €11.1 billion hit, mostly down to the MobilCom affair (see France Telecom Reports H1 for lots of detail), giving the operator a first-half 2002 net loss of €12.2 billion (and taking its losses in the past year to €22.4 billion -- zut alors!). Such numbers will not do much to help the little matter of a nearly €70 billion debt pile, which is more than five times the carrier's valuation. As a result, the share price headed sud Friday morning by more than 10 percent, trading at less than €9.7 just before noon in Paris. The 1997 IPO price was €27.75, and its 12-month high was €48.16.
Bon's Gone ("Off With His Head!")
Let's look at these tragedies one by one -- first off, the eclipse of another CEO. Bon is now clearing his desk and, like several other former giants of European telecom, will soon be tending to his window boxes and shrubs (see Smits Quits KPN). No surprise at all here: The ever-increasing debt and the MobilCom debacle (see MobilCom Checks Into 3G's ER ) made his position increasingly untenable.
Now the French government, which still holds 54 percent of the telco's stock, is looking for "an industrialist who knows the business and the market, with an international outlook," stated French finance minister Francis Mer in a radio interview with RTL. Mer has given himself three weeks to name the next lucky blighter. Can the French outdo the Germans and appoint someone even older than Deutsche Telekom AG's (NYSE: DT) current head honcho Helmut Sihler? (See Sommer's Over at DT.) Maybe not.
The bookmakers' favorite to take the helm is 47-year-old Thierry Breton, currently CEO at Thomson Multimedia. He may take some persuading. His last annual paycheck was about €1.26 million, while the CEO post at France Telecom pays about €1 million less than that.
Unstrung would like to suggest an alternative candidate: Gerard Depardieu. Known internationally, he is a great orator and would be good in a fist fight. He gets our vote.
What legacy does Bon leave behind? This was the man behind the acquisition of Orange SA from Mannesmann for €39.5 billion in May 2001 (as Mannesmann was being bought by Vodafone Group plc [NYSE: VOD]), a deal that included €21.4 billion in cash and the remainder in shares. He has also claimed personal responsibility for paying €3.74 billion for a 28.5 percent MobilCom stake in March 2000. Recently he has stubbornly refused to back a capital increase to deal with the building mountain of debt. So while he built an empire that includes one of the world's most successful international mobile operations, and one of the leading global providers of corporate communications services in Equant (NYSE: ENT; Paris: EQU), the ultimate price was his head.
MobilCom Hung Out to Dry
Analysts and investors, it seems, view Bon's departure as good news (as something may now be done about the debt), and they feel the same about the dumping of German mobile player MobilCom.
Jens Schott, an equity analyst with ING BHF-Bank in Frankfurt, believes FT has made the right decision. "It was no big surprise. The UMTS business would never have become profitable [for MobilCom]," Schott says. Orange does not need a pan-European footprint to do well, he adds. Its focus is on a strong presence in core markets, with good margins.
With MobilCom and Group 3G out of the frame (see Dead End for German 3G Dodos), the German 3G market is a four-horse race, with two strong players (T-Mobile and D2 Vodafone), and two weaker hopefuls in O2 Germany (still referred to as Viag, its former name) and E-Plus Mobilfunk GmbH. In Schott's view, "we haven't heard the final word on E-Plus and Viag. If Viag doesn't reach profitability by the end of this year, some sort of decision will have to be made [by parent mmO2 plc]. A merger between these two is a possibility."
Bankruptcy would see MobilCom's 3G license returned to the state, unless the company were acquired lock, stock, and barrel by a concern not already holding a license. France Telecom will face a legal challenge by the German firm over its decision, but the French giant seems convinced that any agreements it made regarding the future funding of MobilCom were rendered void by "a series of serious breaches of the agreement" by MobilCom and its principal shareholder and former CEO, Gerhard Schmid (see French Snub Mr. Schmid).
MobilCom's shares sank to a new low of less than €1 on the Neuer Markt this morning, valuing the company, which serves about 5 million GSM customers, at about €35 million. In July 2000 the share price hit €147, valuing the firm at about €7 billion. Ouch!
FT has done the decent thing with MobilCom's bank and vendor financing debt, though, by offering convertible securities (convertible into FT, not Orange, shares) in exchange. "As a result," the telco notes, "France Telecom took a provision for risks of €7 billion euros in its accounts for the six months ended June 30, 2002, related to the purchase of liabilities from banks and suppliers, and a total depreciation of the €290 million in shareholder loans granted by France Telecom to MobilCom in the first half of 2002." The suppliers are Nokia Corp. (NYSE: NOK) and Ericsson AB (Nasdaq: ERICY) (see FT, Ericsson Ink MobilCom MOU and Nokia Provides Q3 Outlook).
Debt – and What to Do With It
So what happens next? With decent ongoing cash flow (€3.6 billion net in the first half), the main focus is to cut debt and costs. The trick is to have somebody that can do it the French government's way. The catch is that only the government knows what that is -- it has announced its intention to prevent funding problems at France Telecom, and that it will contribute to capital strengthening, but has not offered much detail.
Investors are clamoring for a €10 billion to €15 billion rights issue. Analysts at Lehman Brothers describe the lack of a rights issue announcement as "disappointing." European financial group SEB is also hoping to see new stock made available, but notes that "the French government has so far not been very clear exactly what type of support it could... offer to France Telecom." Other options mentioned include a refinancing of debt.
Craig Johnson, an independent analyst based in Portland, Ore., sees staff numbers taking a heavy hit to help reduce opex. "More and more people will be laid off. France Telecom is so bulked up, there's no way they can sustain that many people."
But that could be a political hot potato (or pomme de terre chaude, as the locals would call it). "Unemployment is high in France," notes Johnson, though he still predicts layoffs.
Juicing the Orange
While the world goes crazy around it, FT's mobile unit, Orange, remains a strength (see Orange Reports H1). Apart from nice numbers that beat analyst expectations -- with EBITDA particularly healthy, up 41 percent to €2.3 billion, against the €2.1 billion or so expected by equity analysts at Dresdner Kleinwort Wasserstein (DRKW) -- Orange had its first net profit, €218 million, before exceptional items.
The pesky exceptional item that spoiled the party was a writedown of €1.1 billion on the value of the Italian operator, aptly named Wind Telecomunicazioni SpA, in which Orange has a 26.6 percent stake. This brought the net loss to €862 million.
Orange's first-half revenues were up 13.8 percent to €8.1 billion. It is now targeting an EBITDA of €4.7 billion for the year, up from the previous goal of €4.3 billion.
As the tight figures suggests, Orange is keeping costs under control. While not very heartening for vendors, this will cut Orange's peak funding needs by around €2 billion to less than €8 billion for 2003. Orange is heading for a capex-to-sales ratio of less than 10 percent by 2006, while the DRKW analysts had been expecting a ratio of around 14 percent.
The main concern for Orange is the outcome of FT's yet-to-be-decided funding strategy, as there is still the possibility that the telco may decide to sell part of its stake in the wireless business. That would make little sense, says Craig Johnson: "How do you get cash flow when you're selling off your best assets?"
The bottom line: It was a bloody Friday the 13th for France Telecom. And just when you thought the blood-letting was over, rumors hit the wires that Michel Bon was not alone when he fell on his sword. A Dow Jones report suggests four other board members joined him "in sympathy." When will the horror end?
— Ray Le Maistre, European Editor, Unstrung, with additional reporting by Ouida Taaffe
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