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ComputerWire: IT Industry Intelligence

France Telecom SA is now facing an agonizing dilemma over whether to pull the plug on its struggling German mobile affiliate MobilCom AG in a decision that will have far-reaching implications for the Paris, France-based incumbent.

The future of chief executive Michel Bon is now on the line with signs that the French government, which holds a 55% stake in the company, is increasingly unhappy over his stewardship that has landed the company with an unsustainable 70bn euros ($68.6bn) in debt.

Last week, France Telecom delayed their first-half results until September 12 to consider the future of its 28.5% holding in MobilCom. However, according to a leak to the Wall Street Journal, a report commission by France Telecom with a German consultancy cast doubt on MobilCom's ability to compete with its stronger competitors, and said that its customer base was eroding and customer satisfaction was very low.

Like many expensive consultancy reports, this was a statement of the obvious, and its main purpose may well be to persuade the company's founder Gerhard Schmid to part with his holding of close on 50% of the company's equity for a lower figure than he was considering.

The problem for France Telecom is whether to press ahead with restructuring MobilCom or to take the decision that a German operator with an eroding base of just 4.9 million customers is not worth the investment and let it slide into bankruptcy. The high cost of setting up a German 3G network against strong established players has already persuaded Sonera and Telefonica to scrap their Group 3G UMTS GmbH joint venture.

France Telecom has reached agreements with banks on restructuring MobilCom's 4.7bn in debt ($4.6bn), but needs to reach a deal with Nokia and Ericsson on 1.2bn euros ($1.17bn) of vendor financing.

Clearly France Telecom needs to gain control of MobilCom and roll it into its own Orange SA operation, where it will benefit from being part of a broadly-based group. However, expansion is difficult for a company mired in debt. And brooding over the company is the French government, which would have to pay the major part of a rights issue that is the only immediate answer to its debt problem.

But there are signs that the French government is growing impatient over the performance of Michel Bon. Quite apart from the possible cost to the treasury of his actions is the fact that many French voters paid the equivalent of 27.70 euros ($27.1) for each share at the time of its 1999 IPO and now see the shares valued at 11.90 euros ($11.66).

Just as the German government responded to similar problems at Deutsche Telekom by putting the knife into chief executive Ron Sommer in July, so the French government could well decide that the price of aiding France Telecom will be to guillotine Michel Bon's continued leadership of the company.

© ComputerWire

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