France Telecom in Scrap Over State Aid

You thought the Olympic Games was the only spectator sport worth watching this summer? Think again. An almighty scrap has been brewing in Europe, and the first serious blows have just been traded.

In the blue corner we have national operator France Telecom SA (NYSE: FTE), and in the red corner the European Commission (EC).

If nothing else, the encounter shows the French operator to be one of the world's most combative, with an arguably unparalleled line of entertaining fighting talk.

BIFF! The EC struck a warning blow in January 2003 by announcing it was investigating various activities by the French government that might be construed as illegal state aid to the incumbent operator.

THWAK! As the investigation reached its climax and the EC planned to announce its findings, France Telecom took up a preemptive posture last Friday by announcing that any "negative decision [would] contradict business reality and would amount to a serious violation of EU law."

It added: "France Telecom therefore confirms that it will take all possible measures to defend the interests of the Group and its 1.4 million shareholders." And with that, its staff retired to their local brasseries to cogitate over an absinthe and plan some tire burning (or was that the farmers?).

KERPOW! The EC gives the operator a bloody nose with its decision that the carrier had received state aid in the form of tax exemptions of between €800 million (US$983 million) and €1.1 billion ($1.35 billion), and that this has to be paid back with interest (see EC Rules Against France Telecom). The EC says the exact amount that has to be repaid will be determined at a later date.

The telecom team at Lehman Brothers reckons the final figure to between €1.2 billion ($1.47 billion) and €1.7 billion ($2.1 billion).

The EC also ruled that the offer of a shareholders' advance worth up to €9 billion in late 2002 improved the carrier's financial position, as it "created expectations and confidence on the financial markets and helped maintain France Télécom’s investment rating." That offer therefore contained state aid "components," according to the EC, but it is not imposing any financial penalty for this alleged misdemeanor, dubbed "psychological state aid" by some of the carrier's critics.

ALORS! France Telcom retaliates with a verbal blow to the midriff via a press release with the Rabelaisian headline: "Confident of its rights and determined to take all possible measures to protect the interests of the Group and all its shareholders, France Telecom will lodge an application for annulment against the recent European Commission decisions." À bout de souffle! (See France Telecom Hits Back at EC.)

According to the carrier, the EC "appears to have made its decision without precision, in a climate of confusion fueled by many leaks, rumors, and public announcements that have been premature to say the least. In reality, today's decision lacks any economic or legal basis: France Telecom has not received any State aid." Au contraire, says the carrier: It claims it has been over-taxed by about €1.7 billion.

The next step? France Telecom says it will "refer the case to the Court of First Instance of Luxembourg to have the European Commission's decisions repealed," and notes that the French government will also appeal against the EC's decision.

With the whole of France about to go on its annual vacances, further fisticuffs are unlikely before the autumn. And in the meantime, at least one credit agency is playing down the incident. Standard & Poor’s says the carrier has a "strong cash flow and focused financial policy," and that its ratings and outlook for the carrier remain unchanged despite the possibility of a "substantial cash outflow."

— Ray Le Maistre, International News Editor, Light Reading