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FT Finances In The Balance

French press reports that France Telecom SA (NYSE: FTE) will be bailed out of €9 billion ($8.9 bn) of debt by the French government went unconfirmed yesterday, although the carrier's stock rose on the news and was trading at 16.25, up 1.59 (10.85%) in late afternoon.

But sources say that even if true, a state reprieve will go only partway to alleviating the French carrier's financial woes.

Much more will be needed, they say, including layoffs and asset sales expected to be instituted by new CEO Thierry Breton (see Can Breton Fix France Telecom?).

"I don't think it changes things. It's just refinancing maturing debt," says Bradley Bugg, analyst with Dresdner Kleinwort Wasserstein. He says the French government, which already owns about 55 percent of France Telecom, has long been expected to help keep it afloat.

France Telecom, along with Deutsche Telekom AG (NYSE: DT), is one of Europe's most heavily leveraged telecom providers (see Debt Weighs on Euro Carriers and Has Catastrophe Hit the European Telecom Market?). For the first half of 2002, France Telecom reported a whopping net debt of €69.7 billion ($69.1 bn) (see France Telecom Posts 1H Returns ). The French government payment of 9 billion, if it comes, would help cover the carrier's immediate debt requirements.

But more is needed, and analysts expect an announcement by Breton next week to include big financial adjustments. Questions surround what form those adjustments will take.

That's where France Telecom's government ties could be a hindrance. Like Deutsche Telekom, which has suffered massive layoffs (see DT's Layoffs: The First of Many?), France Telecom already has met sizeable resistance to cutting employees. Layoffs are tougher to institute in France than in North America, and the carrier has a large portion of its employee roster listed as government workers.

"It's really a tricky situation," says Richard Webb, European market analyst at Infonetics Research Inc. Unfortunately, it may be necessary for France Telecom to bite the hand that feeds it (laying off state workers while taking state aid) in order to survive.

It's also not clear yet just how France Telecom will rearrange its assets to fit its financials. News of ongoing adjustments at Orange SA (London/Paris: OGE), the mobile segment of the carrier's business, including a final arrangement with Germany's MobilCom AG (see FT, MobilCom Break Up and MobilCom's Monster Q3 Debt) have failed to impress some financial observers, who say these deals too were expected.

"We already incorporated the expectation [of the Mobilcom agreement] into our ratings," says Guy Deslondes of Standard & Poor’s. While his firm continues to rate France Telecom securities as investment grade, he say it remains to be seen whether the company can get its legs beneath it in the long term.

"To remain at this rating the company needs to steadily reduce its debt," he says.

France Telecom's sale of its interest in Vodafone-Panafon, a Greek mobile operator, for €310 million ($307m), announced yesterday, hardly makes a dent in its debt mountain (see Vodafone Ups Euro Stakes).

— Mary Jander, Senior Editor, Light Reading
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