"Gervais Pellissier, France Telecom's finance director, told the Financial Times that his company was examining a possible takeover bid for TeliaSonera, a Swedish-Finnish operator, adding that Norway's Telenor was also a potential target.The latter is the parent company of Hungarian mobile carrier Pannon. The interest of the French operator was confirmed by the company but it was stressed that negotiations were not yet underway.
Ever since Pellissier's confirmation on Thursday of an earlier report in Le Figaro, the share of France Telecom have been going sharply down and management is fighting against the markets seemingly well-founded conclusions or fears.
French daily Le Figaro reported on Wednesday that France Telecom was making preparations to buy up TeliaSonera and in the end the suggestion of a possible tie-up was confirmed.
"If you ask me whether we are examining a number of companies, including TeliaSonera, I would say yes," Pellissier told the FT on Thursday. “But if you are asking whether this is a full-blown examination, we are not there yet," he added.
He noted that France Telecom was also exploring other options, including with Telenor, but stressed that the former French monopoly saw "no need to hurry".
Telenor is the parent company of Hungary's Pannon, so if France Telecom acquired the Norwegian operator, Hungary's second-largest mobile carrier would also change owners. Analysts give a smaller chance for this scenario than to France Telekom buying the other Nordic operator, but they basically frown on both versions. This is well reflected by the fact that the share price of France Telecom dropped both after the El Figaro article and the FT piece, while the two potential targets gained.
The market is mostly concerned about the bad acquisition track record of France Telecom, as the efficiency of integration at several of its previous purchases was behind expectations.
Moreover, TeliaSonera is already a merged entity and given its existing complexity it would be hard to identify points of synergy.
Responding to a dive in the price of its shares, which hit an 8-month low on concerns that the takeover of TeliaSonera would not only be risky but could also destroy shareholder value, France Telecom issued a press release on Friday, which is as follows:
“Taking into consideration the movements in its share price, and the persistent rumours in respect of negotiations to acquire TeliaSonera, the Group wants to clarify that these rumours do not reflect the current status of the situation."
“The mergers & acquisition policy [...] is based on following objectives:
• reinforce our footprint on emerging markets
• strengthen as appropriate our activities in Western Europe
• acquire complementary competencies in certain key areas."
“This policy must be understood in the context of a market that is in constant evolution. The development of new services and new business models is facilitated by reaching a critical size in an eco-system that favours global players. There are still growth opportunities to be captured in emerging and in developed markets for well positioned players."
“Beyond synergies derived from in-market consolidation, business combinations can generate industrial and financial synergies through the acquisition of assets (market share, distribution networks) and economies of scale in traditional activities (for example networks, handsets, R&D and innovation), as well as in new services (audience, content, mobile internet)."
“The announced privatisation of TeliaSonera could present a strategic opportunity. France Telecom and TeliaSonera are in fact two complementary groups with a common strategic vision of the sector, and both have accomplished a significant transformation of their business models. A transaction could only occur with strict respect for France Telecom's commitments regarding its medium-term debt to gross operating margin ratio, and its cash dividend policy."
The company stressed that “exploratory steps have been taken," but no negotiations have commenced at this stage and “therefore no decision in respect of such an opportunity is in the process of being taken".
The Swedish state owns 37.3% of TeliaSonera shares and Finland 13.7% while the French state has a 27.3% holding in France Telecom.
The deal, which would create Europe's largest phone company by sales and its third-biggest by market capitalisation. would be funded with a “balance" of cash and debt, with possibly a brief exception to the group's debt ratio ceiling, Pellissier said in a conference call on Friday.
In a bid to maintain shareholder support, the company also pledged that the dividend payout ratio would be maintained or increased.
Consolidation ahead?
Europe's telecoms sector may be labelled as fragmented and a growing number of analysts have been saying lately that consolidation of the segment will start soon. It is indeed highly possible that the sector is just being hit by the first wave of takeovers, since this is the third news of this kind in the past weeks. Only a few weeks ago, Deutsche Telekom acquired a 20% stake in the largest Greek telecom service provider and a few large shareholders have started to nudge Telekom Italia to merge with Telefónica, which indirectly holds a 10% stake in the company.
If consolidation really kicks off, Spain's Telefónica, Germany's Deutsche Telekom, France Telecom and Vodafone of the UK will obviously be on the buyers' side, while targets could include Telekom Austria, Portugal Telecom, TeliaSonera and Telenor."
Source: Portfolio Online Financial Journal
21.04.2008