France Télécom's Morning After

A multibillion-dollar write-down may be just the beginning

It was a humbling admission from one of France's blue chips. On Mar. 11, France Télécom (FTE ) Chief Executive Michel Bon disclosed that the phone giant, in announcing 2001 results on Mar. 21, will write down as much as $10.5 billion on investments in British cable operator NTL Inc. and German cell-phone company MobilCom. "The bubble is over. We have to bear the consequences," he told Le Monde.

Bon may as well be speaking for every telecom boss in Europe. France Télécom, Deutsche Telekom (DT ), BT (BTPLF ), and other telcos bet billions on their vision of a future where 3G cell phones, high-speed connections, and brand-new applications would wring ever more money from customers. But that future didn't arrive as quickly as they expected. Now they are paying the price.

France Télécom isn't the only company writing down assets. On Mar. 5, Deutsche Telekom posted a $3 billion loss for 2001, including write-downs on the value of its mobile phone holdings and 3G wireless licenses. But cleaning up the balance sheet is only the beginning. Even if the telcos admit their acquisitions are no longer worth what they paid, they still have to repay the megabucks they got from bondholders and banks to finance the deals. Collectively, European phone companies are buried beneath a mountain of $284 billion in debt. The two most heavily indebted, France Télécom and Deutsche Telekom, owe nearly $55 billion apiece.

The telcos' woes also are creating political friction in France and Germany, which are holding national elections this year. The French and German governments still hold controlling stakes in their former phone monopolies, and millions of small investors are none too happy. In the past two years, France Télécom shares have dived 84%, while Deutsche Telekom is down 82%.

Pressure is building. The German government on Mar. 13 rejected a demand from the Society for Protection of Small Shareholders that the government forego any dividend this year on its 38% stake in Deutsche Telekom, to ensure that the dividend paid to small investors does not decline. In France, the government is pressing Bon to write down only a portion of the NTL and MobilCom investments now, to avoid embarrassment before presidential voting begins on Apr. 21. "Negotiations with the government over the magnitude of the write-down are going on right now," says Eric Burkel, head of research at Paris brokerage E.T.C. He thinks the figure announced on Mar. 21 will be less than $7 billion.

That could leave room for another round of write-downs on NTL and MobilCom and also, possibly, France Télécom's investment in Dutch data-network operator Equant. It was valued at nearly $8 billion when France Télécom bought it in 2000 but now is worth only $2.8 billion. However, Bon has ruled out a write-down on France Télécom's biggest acquisition, cell phone company Orange, bought two years ago for $40 billion but now worth less than $31 billion. Orange is "correctly valued on our accounts," he told Le Monde.

No matter how much the telcos write down, they still have to reduce debt. The problem is, how? France Télécom, for example, has said that by the end of 2003 it wants to pare debt by as much as $25 billion by floating additional shares and selling off noncore assets such as its stake in Sprint and in chipmaker STMicroelectronics. But Bon is reluctant to do that now, with telco and technology share prices severely depressed. That leaves France Télécom raising money mostly with small-potatoes deals, such as selling company property then leasing it back. "Mr. Bon has still not given us a clear answer on how he will deal with all of this," says analyst Peter Wirtz of WestLB Panmure.

At least France Télécom's revenues were up 28% last year, including robust 70% growth in its Orange mobile-phone business. But France Télécom's debt could balloon by another $4 billion or so if MobilCom CEO Gerhard Schmidt, now locked in a feud with France Télécom over wireless investments in Germany, exercises an option that could force the French to buy out his stake in MobilCom. Standard & Poor's has warned that could jeopardize France Télécom's debt rating. The bubble has burst. But the pain isn't going away.

By Carol Matlack in Paris

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