French telecommunications giant has yet to make a decision, start talks
LONDON (MarketWatch) -- France Telecom SA on Friday confirmed its interest in Nordic operator TeliaSonera AB, but said it has yet to make a decision or start takeover talks. The French group also sought to explain the reasoning behind its newfound appetite for large-scale acquisitions in an effort to allay investors' growing alarm.
For France Telecom (FR:013330: news, chart, profile) , a purchase of TeliaSonera (SE:TLSN: news, chart, profile) would be a "strategic opportunity," Chief Financial Officer Gervais Pellissier told journalists on a conference call.
He said the group had decided to clarify its thinking because of the 12% plunge in the share price over the past three days, and tried to reassure investors that there would be no going back to the reckless merger-and-acquisition strategy that marked the start of the millennium.
In particular, he stressed that France Telecom wouldn't allow its ratio of debt to earnings before interest, tax, appreciation and amortization to go beyond 2.5 and would aim to bring it back to 2 within three years in case of a deal.
The Swedish company has a market value of roughly $38 billion and Pellissier said France Telecom would pay for any deal of this size with a combination of cash and shares.
When French newspaper Le Figaro first reported France Telecom's interest in its Nordic peer on Wednesday, it said the French company was considering an all-stock deal.
Pellissier stressed that for now only "exploratory steps" have been taken.
A potential tie-up would create a telecom giant with annual sales of 63 billion euros ($100 billion) and an established presence in France, Spain and the U.K., as well as in Nordic and Baltic states. It would also allow France Telecom to better compete with Deutsche Telekom AG (DE:555750: news, chart, profile) , Europe's largest telecom company by revenue.
France Telecom shares were last down 1.5% in Paris early afternoon trading. Also see Europe Markets.
Biggest deal since Orange acquisition in 2000
Should the takeover happen, it would be France Telecom's largest acquisition since it bought Orange in 2000 for 27.8 billion pounds ($55 billion).
Analysts over the past two days have questioned the wisdom of such a deal and underscored the poor track record of France Telecom when it comes to acquisitions.
Dresdner Kleinwort on Thursday cut its rating on the company to hold from buy and slashed its price target to 20 euros from 27 euros, saying it was losing confidence in its strategy and saw little logic in a deal with TeliaSonera. On Friday both Dexia and Oddo Securities downgraded the stock, citing similar concerns.
On Friday, following the conference call, Dresdner downgraded the stock again, this time to sell, saying management is clearly committed to gaining scale and if not TeliaSonera, something else will come.
At Goldman Sachs, analysts said such a transaction would be a departure from France Telecom's recently stated acquisition strategy, which they said suggested a strengthening of its existing footprint in Europe rather than an expansion into the Nordic region.
France Telecom's major markets are in Spain, Poland, the U.K. and several Eastern European countries. It recently bought assets in Kenya and Jordan as part of a strategy to build its presence in higher-growth emerging markets of Africa and the Middle East
Goldman noted, however, that France Telecom may consider new M&A options if it believes wider sector consolidation could happen faster than previously thought.
One recent trigger may have been Deutsche Telekom's decision to buy into Hellenic Telecommunications Organization, Greece's largest phone company.
But Goldman warned that a France Telecom bid for TeliaSonera would likely spook investors, given the tough competitive dynamics in Sweden, the limited synergies of any deal apart from the closing down of TeliaSonera's loss-making Spanish operations and the lack of control over Russia's Megafon and Turkey's Turkcell, in which TeliaSonera has minority stakes.
Scale needed to fend off Google, Apple, Microsoft
Pellissier responded to some of these arguments on Friday, saying that synergies would not be limited to where there is geographical overlap between the two companies. He underscored that they share the same long-term vision and ambitions and both embrace convergence.
He emphasized that scale would be crucial in the upcoming years as telecom operators, cable companies, and also media giants and Internet behemoths such as Google, Inc., fight for control of a world of unified communications. France Telecom doesn't want to be left behind as the likes of Google and Apple Inc reap most of the added value of new services.
"This is where the battle of the next few years will take place," Pellissier said.
He added that greater scale would ensure that France Telecom has a say over which technology standards were adopted. It needs to be bigger to be heard at a table with giants such as China Telecom.
His explanations, however, got a frosty reaction from some analysts.
"Taking on Google is not a good idea and we are concerned that France Telecom is even thinking along these lines," said Nomura International's Martin Mabbutt.
"If France Telecom really believes that this is the way its business needs to develop, then there is a never ending stream of M&A to come, and it will never be enough to create the scale it wants," he added.
A France Telecom purchase of TeliaSonera would also involve complex political negotiations as France Telecom is 27%-owned by the French government while the Swedish and Finnish governments have respective 37% and 13.7% stakes in TeliaSonera.
In the past, the Swedish government has indicated an interest in selling its TeliaSonera stake.
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