France Telecom currently holds an 87% controlling stake in Orange, with the remaining 13% held by minority shareholders. The French carrier is offering 11 of its own shares for 25 Orange shares. The bid values each Orange share at 9.94 euros ($10.90) on the basis of France Telecom’s closing price on Friday.
Orange is the main growth driver for France Telecom, and taking full control of the mobile operator should remove any potential conflict of interest over investment levels and the payment of an Orange dividend. If the minority shareholders decide to accept the deal, they will swap a 13% stake in Orange, for a 12% stake in France Telecom. France Telecom, once it raises its stake in Orange to 95%, can force the purchase of the remaining minorities.
The bid for the rest of Orange reflects France Telecom’s recent return to financial health. It reported a net profit of 2.5bn euros ($2.74bn) for the first half of the year, compared to a loss of 12.2bn euros ($13.3bn) a year ago, on revenues down 1.7% at 22.85bn euros ($25bn) from 22.47bn euros ($24.6bn) for the same period in 2002. This is a far cry from last year, when it was on the brink of collapse, after a spending spree left it facing a huge debt pile of 68bn euros ($78.17bn). However, new management, a highly controversial cash injection of 9bn euros ($10.3bn) by the French government, and a restructuring program, have helped put France Telecom on the road to recovery. Net debt fell to 49.3bn euros ($54bn) at the end of June, down by 18.7bn euros ($20.5bn) since the end of December. Debt levels are expected to fall below 50.4bn euros ($55.2bn) by the end of this year.
France Telecom’s bid will see the French government’s stake fall from 58.9% to 54% on a non diluted basis, and just above 50% on a full diluted basis. By law, the French government’s stake must remain above 50%, but by the end of the year it hopes to pass a law that will allow it to reduce its stake to below 50%. The reason for the change in the law is to allow the French government to proceed with a privatization program to help restore the health of French public finances.
It is not hard to see why France Telecom is so keen to strengthen its grip on Orange. For the first half of the year ending June 30, Orange reported net income of 3.26bn euros ($3.57bn) compared to a net loss of 862m euros ($944m), on revenue up 6.9% at 8.615bn euros ($9.44bn) from 8.059bn euros ($8.83bn) in the same period in 2002.
