France Telecom: Now The Hunting Begins

With its Deutsche Telekom link unraveling, it's chasing deals

No one could accuse France Telecom CEO Michel Bon of moping around like a jilted bride. He has put his company aggressively back into circulation since its partnership with Deutsche Telekom foundered this spring after the Germans made an unsuccessful play for Telecom Italia. The French telephone giant is helping bankroll a $12.4 billion bid by British cable-TV company NTL Inc. for Britain's No. 1 cable operator, Cable & Wireless Communications PLC. That could give France Telecom a foothold not only in cable but also in telephone and Internet services in Britain.

But Bon has to act fast if he wants to achieve his goal of making France Telecom a European champion. Europe is on the verge of a telecom shakeout that will give the advantage to those players astute enough to assemble viable cross-border empires. Competitors such as British Telecom PLC and Mannesmann, as well as American players such as Microsoft Corp., are well along that path. To keep pace, France Telecom needs to make strong moves outside its home market, with acquisitions and partnerships that will let it offer a full range of services, from telephone and television to high-speed data transmission and Internet access. "Clearly, we have the ambition to be one of the largest in Europe," says Bon.

BIDDING WARS. France Telecom's British move is a good start. On July 15, it announced it would pay $1 billion for a 10% stake in NTL, a leader in offering package deals for telephone and Internet service via cable TV lines, and put up an additonal $4 billion to bankroll the Cable & Wireless acquisition. With the deal now on a fast track, France Telecom is positioning itself to challenge BT on its home turf, much as the British company has pushed hard into nontraditional lines of business on the Continent. Bon says France Telecom might also bid on one of the new British mobile telephone licenses to be auctioned next year.

Bon's next move could be across the Rhine. France Telecom and Deutsche Telekom signed an agreement last year not to poach on each other's territories. But that pledge is likely to be torn up soon. If that happens, Bon says, "we will have to go into the German market." Already, analysts are speculating that France Telecom may try to acquire German long-distance and mobile-phone companies such as MobilCom and TelDaFax.

Bon has stumbled in previous attempts to push beyond France's borders. Only 8% of France Telecom revenues come from other countries, compared with 11% for BT. But its falling-out with Deutsche Telekom threatens the future of Global One, a partnership in which the two companies, along with Sprint Corp., together have sunk $1.4 billion. Bon says the venture, which provides a full range of telecom services to multinational companies, is functioning well, though not yet profitable. He insists that it can be saved, but adds: "We have to fix a better agreement between the partners."

No kidding. Bon and Deutsche Telekom CEO Ron Sommer haven't talked for nearly two months, and France Telecom is suing the German company for having courted Telecom Italia. If Global One does survive, it will almost certainly not contain both Deutsche Telekom and France Telecom. One or the other will sell its stake and seek out new alliances. The two companies also will have to untangle an Italian mobile-phone venture called Wind, in which both have a stake.

At home, France Telecom is holding its own. Thanks largely to savvy marketing and price-cutting, the 62% state-owned company has grown more robust since France's telephone market was deregulated in January, 1998. Unlike BT, it is the dominant mobile-phone company and Internet provider in its home market. France Telecom has also benefited from friendly regulators who let it charge high access fees that squelch competition for long-distance customers. In Germany, where access fees are much lower, Deutsche Telekom has lost about one-third of its long-distance business.

The numbers send a clear message. To keep its profits increasing, France Telecom must continue to expand internationally. The company's 1998 sales were $28 billion, up 5.2%. International revenues grew 39% as the company extended its mobile-phone business to 24 countries, including major ventures in Spain and Italy. Still, earnings were up only 1.5% because of price-cutting to protect the company's domestic market share.

That only underscores the real urgency of Bon's task. Friendly French regulators can help give him an edge at home. But they can't help him where it counts the most--across the border.

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