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April 17, 2005

France Telecom spends again as it follows “go East” trend

France Telecom, the heavily indebted French carrier, is spending yet again as it follows the trend of moving into the rapidly growing Eastern European market.

By CBR Staff Writer

The French carrier is to increase its stake in Orange Romania from 73.27% to 96.63%. The deal to acquire the shares from a group of minority shareholders has been priced at 408m euros ($527m), valuing the Romanian operator at approximately $2.2bn.

Orange Romania has a domestic market share of 48% and its sales grew 47% in 2004.

The 23.3% Orange Romania stake was sold to France Telecom by a group of investors including AIG Capital Partners, Enterprise Investors, Innova Capital Bank of America, Societe Generale Romania Fund and Alcatel, the phone company said.

France Telecom has been on a bit of a spending spree recently. It recently paid 564m euros ($737.9m) to buy out the minority shareholders who own 46% of network operator Equant, as well as spending many millions of euros buying out the minorities in Orange and Wanadoo, its ISP unit.

The Romanian deal however is part of an European trend to the shift focus from the heavily saturated Western European market that offers very little growth prospects, to the rapidly growing Eastern European markets. For example, market penetration averaged more than 90% in Western Europe at the end of September (last year), and has climbed to more than 100% in Italy, Sweden, Greece and Portugal, according to BNP Paribas research.

Last month Vodafone Group agreed to pay $3.5bn for Romania’s MobiFon and Prague-based Oskar Mobil. More recently, Spanish operator Telefonica acquired a 51.1% stake in Ceský Telecom, the Czech Republic incumbent, for 2.74bn euros ($3.55bn). Telefonica is also considering bidding for the 55% stake that Turkey is selling in phone company Turk Telekomunikasyon AS.

France Telecom will continue to seek acquisitions or higher shareholdings in fast-growing markets, said CFO Michel Combes. Orange is the fourth largest European mobile operator, behind Vodafone, Telefonica and Deutsche Telekom AG’s T-Mobile.

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This commitment to seek further acquisitions is rather concerning considering the carrier’s enormous debt pile. Indeed, debt levels at France Telecom have risen alarmingly after the carrier adopted International Financial Reporting Standards (IFRS) instead of French GAAP. Its debt has risen by 6bn euros ($7.7bn) to a staggering 49.9bn euros ($64.48bn), as it conforms to the new accounting rules.

Publicly-listed companies in Europe began the switch to IFRS at the start of this year. The aim of the new rules is to harmonize the global presentation of financial results, especially the messy European format, making it easier to compare companies across borders.

France Telecom is still one of the world’s most indebted telecoms firms, but it is in the third and final year of a recovery plan whose aim was to reduce its debt to less than 40bn euros ($51.68bn) by 2006.

The French carrier built up its vast debts due to an ambitious expansion plan in the late 1990s which saw its debt peak at 68bn euros ($87.87bn) in 2002. This led to many questioning the carrier’s viability, and it took an illegal state package from the French government, plus a change of management and massive job cuts to get the carrier back on its feet.

Last month, appointed a little-known technology executive (Didier Lombard) to succeed its former chief executive Thierry Breton, who became made the country’s fourth finance minister in the space of a year.

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