Orange acquisition gives France Telecom U.K. foothold

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NEW YORK-In a move that, ironically, furthers consolidation in Europe’s deregulated telecommunications market, France Telecom said May 30 it would buy Orange plc from Vodafone AirTouch plc for $38 billion plus the assumption of $2.7 billion in outstanding Orange debt.

The acquisition gives the French carrier a foothold in the United Kingdom and will create Europe’s second-largest mobile wireless operator. London-based Orange has a market share of 22 percent, comprising nearly 7 million customers on its Global System for Mobile communications 1800 network. Orange also is part owner of wireless carriers in Belgium, Switzerland and Austria.

Paris-based France Telecom, whose majority stakeholder is the French government, dominates the overall telecommunications market in its domicile country. Its GSM 900 and 1800 network had just more than 10 million subscribers at the end of last year, for a market share of 48.7 percent. France Telecom also has extensive wireless assets in other European countries, including its recent purchase of a 28.5-percent share of Germany’s MobilCom.

The wireless businesses of the two companies will be combined into an entity that continues under the Orange corporate name, with Orange’s two top executives remaining in charge: Hans Snook, chief executive, and Graham Howe, deputy chief executive and chief financial officer.

“The acquisition of Orange and the creation of New Orange are a major step in France Telecom’s strategy to become a European and global player,” said Michael Bon, chairman and chief executive officer of France Telecom.

“Orange’s management has proven … to be the leaders in identifying and developing a wire-free future, and we believe the creation of New Orange under the leadership of Hans Snook as a separately quoted company will bring substantial benefits for France Telecom, its employees, shareholders and customers.”

Consummation of the Orange acquisition is contingent upon several factors, including approval from the European Union. EU rules prohibit Vodafone from holding two mobile wireless licenses in the United Kingdom.

Vodafone acquired Orange as part of its $180 billion takeover of Germany’s Mannesmann AG, which had itself just acquired Orange in late 1999. In a conference call May 30, Chris Gent, chief executive of Vodafone, said the British carrier had $29.34 billion in debt following the Mannesmann purchase. It anticipates an additional $10 million in outstanding indebtedness when it pays this autumn for the U.K. third-generation licenses it won.

Cash proceeds from the Orange sale, combined with divestiture of several non-core Mannesmann assets-Infostrada of Italy and Arcor of Germany-will reduce Vodafone’s outstanding debt to approximately $16.7 billion by the end of the fiscal year, Gent said.

Snook, Orange’s chief executive, waxed poetic about the merits of the merger with France Telecom in an apparent change of heart compared with his vocal public posturing in the months preceding the deal.

“Orange has long said that the mobile industry must create regional and ultimately global footprints, ensuring the seamless branding and operation of wire-free services and the maximum value for customers and shareholders alike,” he said.

“Today’s agreement more than doubles Orange’s scale, reach and capacity to innovate … We have a wealth of talent by combining France Telecom’s and Orange’s wire-free businesses and the platform from which to build a leading global wire-free business.”

Prior to May 30, Snook had been pressing for a spinoff of Orange, Vodafone’s main competitor in the United Kingdom, and a re-listing on stock exchanges of Orange as an independent company. In a presentation in New York in March, he said that as soon as the divestiture from Vodafone occurred, Orange would be scouting for acquisition targets in the United States.

The Times of London reported May 23 that Vodafone AirTouch “could face conflict of interest objections from the European Union if [it]cancels the de-merger of Orange and sells it to France Telecom.”

The FT-Orange merger also hinges on U.K. Radiocommunications Agency confirmation of Orange’s winning bid of $6 billion in the recent Universal Mobile Telecommunications System auction. Orange won License E for two 10-megahertz blocks of paired spectrum and 5 megahertz of unpaired spectrum. In preparation for the acquisition of Orange and its next-generation U.K. wireless license, France Telecom arranged bankcredit facilities of $30 billion from Banque Nationale de Paris, Citibank, Credit Suisse First Boston, Deutsche Bank, Morgan Stanley and SG Investment Banking.

The management and supervisory boards of France Telecom approved the Orange purchase in the days just prior to the May 30 announcement, but the acquisition also must receive shareholder approval. A vote will be taken during the summer.

In its making the deal public last week, the carrier said the French government, its controlling shareholder, “has indicated it intends to vote in favor of the issuance of new France Telecom shares.” France Telecom said it expects the new shares for the new Orange to be listed on stock exchanges in London, New York and Paris by early next year. It will use proceeds of the stock sale to repurchase $12.62 billion of its shares from Vodafone, which has agreed not to sell any FT stock it owns for at least six months after the equity issuance date.

Upon completion of FT’s Orange acquisition, Vodafone will own about 10 percent of France Telecom but will not have any voting representation on its governing board. The French government’s stake will decline to 54 percent from 61 percent.

In the wake of the merger announcement, Moody’s Investors Service Ltd., London, said May 30 it would review the investment grade debt of France Telecom for possible downgrade and the speculative grade debt of Orange for possible upgrade.

“Although FT and Orange have outstanding track records of building leading positions in the wireless markets across Europe and the acquisition represents an outstanding opportunity for FT, the merger could also represent a significant change (for worse) in the business risk profile of FT,” said Eric de Bodard, managing director, and Carlos Winzer, senior vice president, of Moody’s European corporate ratings.

“The ongoing review of Orange for possible upgrade will focus on the degree of implicit support from FT, as well as the integration risk implied in the intention to combine Orange’s and FT’s wireless assets to form a new company. We expect the ratings of Orange to be close to those resulting from the review of FT.”

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