France Telecom: Keeping faith

16 August 2002

Telecoms stocks have endured a rough ride over the past 12 months. Rising debt levels and a cooling of investor enthusiasm have created an air of deep depression right across the industry. International telecoms operators - overstretched following a spending spree in the late 1990s - are facing some tough choices.

France Telecom is a case in point. Owned 55.5 per cent by the French government, it claims to be the fourth largest telecommunications company in the world, having 107 million customers spread over five continents.

However, its rapid expansion in the late 1990s has come at a heavy price. The company's debts have spiralled to Eur 60,000 million, a figure that US rating agency Moody's Investors Service estimates could climb to as high as Eur 75,000 million - almost three times France Telecom's market capitalisation. As a result, Moody's today rates the operator just above junk bond status at Baa3. At the same time, its share price has plummeted from a high of Eur 219 in 2000 to just Eur 11 in July this year.

Like many of its competitors, France Telecom is now in debt reduction, rather than expansion, mode. Over the past nine months, the company has sold off a host of non-core assets, including interests in satellite and cable television. The disposals are necessary: debt servicing accounts for roughly one-third of the operator's income.

'A low share price, coupled with our debt servicing, has reduced our ability to invest but that is not to say we will ignore our position in key overseas markets like the Middle East,' says Laurent Mialet, executive vice-president of international operations at France Telecom. 'At the outset we had three targets. Firstly, we wanted to become a major operator in Europe, and we probably are. Secondly, we wanted to become a global operator with large multi-national companies. This we have done through our subsidiary Equant. Finally, we wanted to develop our presence in emerging markets like the Middle East.'

France Telecom is one of the leading international players in the Middle East. Since it first ventured into the region in 1994, via the creation of France Telecom Mobiles Liban (FTML), its portfolio has grown to take in telecoms and IT subsidiaries in Algeria, Morocco, Egypt, Lebanon and Jordan. 'Our focus has always been on the Maghreb and the Levant,' says Mialet.

The company's regional breakthrough came in 1998 when it teamed up with the US' Motorola and the local Orascom Telecom (OT) to create MobiNil Telecommunications. Through MobiNil the company acquired a stake in the Egyptian Company for Mobile Services and an important foothold in the region's biggest market for telecoms services.

Seeking to offload some of its risk, France Telecom transferred in June its 71.25 per cent interest in MobiNil to its mobile subsidiary Orange. Nevertheless, the French operator is looking to enhance its position in Egypt and does not rule out gaining complete control of MobiNil, which has more than 2 million mobile subscribers, by acquiring the interest held by OT. 'If our partners were prepared to sell their shares we would certainly be interested,' says Mialet.

But it is in Jordan that France Telecom has its greatest ambitions. In early 2000 it bought a 40 per cent stake in fixed-line monopoly Jordan Telecom (JT) through its 88 per cent-owned local subsidiary Jordan Investment Telecommunications Company. Now it intends to increase its interest in JT. The plan is to acquire a further 2-3 per cent through the government's proposed initial public offering, which will involve 10-15 per cent of JT's equity. If successful, France Telecom will become the majority shareholder in JT and gain management control. JT would then report its financial results direct to Paris.

France Telecom's gameplan for JT does not end there. 'Our strategy will be to develop our business in the region through Jordan Telecom, using Jordan as our hub,' says Mialet. 'Arab countries are our main target in the developing world.'

Several countries are preparing to open their domestic networks to foreign competition, so there should be no shortage of opportunities. If finances allow, France Telecom plans to capitalise on them. 'The Middle East is an unsophisticated market and a lot more opportunities will open up when WTO guidelines on the liberalisation of local telecoms services filter through in 2004-05,' says Mialet.

Among the opportunities being monitored is the proposed privatisation of Tunisie Telecom, which is expected to come to market next year. Syria is another market that could open up if Damascus puts the necessary regulatory framework into place. 'Syria is an underdeveloped market where a lot of value could be created in the medium term,' says Mialet.

With large customer bases, access to markets in North Africa and the Levant is relatively cheap when compared to the Gulf. Apart from Oman, where France Telecom has expressed an interest in Omantel, the Gulf is deemed out of bounds for the operator. 'In the Gulf, the price of an entry ticket into the market will be too high for most international operators. Oman is the only country in the region we are interested in. Others like Saudi Arabia will be too expensive to access,' says Mialet.

Investing in the Middle East's telecoms sector has its pitfalls. France Telecom has experienced the downside of doing business in the region through its operations in Lebanon. The company has sought international arbitration for its dispute with the government over the 10-year build-operate-transfer (BOT) contract signed by FTML to operate the local Cellis mobile network. The government cancelled its contract with FTML last year in a bid to raise $3,000 million from the sale of GSM licences.

International operators like France Telecom are being forced by financial expedience to think carefully before embarking on foreign adventures in developing markets such as the Middle East. The French operator has decided to keep faith with its partners in the region when many have shied away from the risk. In return, it stands to gain a strategic advantage in one of the largest emerging telecoms markets in the world.

Andy Critchlow

Exchange rate: $1=Eur 1.03

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