France Telecom cuts off MobilCom
French incumbent telecoms company France Telecom SA could have found a way to squeeze itself out of the restrictive agreement that bound it to supply finance for German mobile operator MobilCom AG's roll-out of 3G services, a bill that could have topped at least $2.5bn.
This agreement could also have crippled France Telecom by forcing it to consolidate MobilCom's $6bn debts onto its own balance sheet because of a clause in the agreement that would have forced a buy-out to be launched by France Telecom in the event of a serious disagreement between shareholders.
France Telecom initially tried to maneuver out of this situation by organizing a syndicate of banks to buy up MobilCom CEO Gerhard Schmid's 42% stake in the company. However, this deal failed when the regulators blocked the deal. France Telecom, which directly owns a 28.3% stake in MobilCom, is now claiming that the basis of its original agreement between the two companies made in March 2000, which called for France Telecom to invest in the build-out of MobilCom's third-generation network, is now invalid.
Yesterday, France Telecom sent MobilCom a letter terminating the cooperation framework agreement (the original 2000 agreement), claiming that MobilCom and its CEO have broken a number of conditions of the deal. The letter says that MobilCom's supervisory board have misinterpreted the agreement by not allowing France Telecom to approve important strategic decisions and that Schmid has broken a number of German corporate laws with the transactions between MobilCom and Millennium, his wife's investment fund.
Finally, France Telecom claims that a 70m euro ($65.1m) loan repayment that was to be made to France Telecom by June 6 has not been made. Schmid has also refused to resign in connection with this failure, and the supervisory board will not make him. France Telecom therefore claims that it has "clear legal grounds" to end the relationship.
This is likely to push up France Telecom's share price because it is now not obliged to buy out MobilCom or invest capital in the company, although MobilCom, which was not available for comment at time of going to press, will probably mount a challenge to the legal basis of France Telecom's withdrawal from the agreement.
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