Bon and MobilCom's future hanging by same thread

The futures of MobilCom AG and France Telecom SA's chief executive, Michel Bon, appeared to be closely tied together yesterday, as speculation mounted that the embattled head of Europe's number two telco would sacrifice MobilCom to save his job.

According to the French daily Le Figaro on Tuesday, Bon is begging his government masters to be allowed to cease funding MobilCom, even though such a move would almost certainly bankrupt the German wireless operator in which France Telecom has a 28.5% stake.

Yesterday however, as investors wiped 60% off the value of MobilCom shares, it was still unclear what France Telecom's next move will be. The telco's board is thought to be considering the buyout of the company, which is still 50% held by the founding CEO that France Telecom forced out in June, Gerhard Schmid, and his wife Sybille Schmid-Sindram.

But Bon is said to be against this move, which would leave France Telecom holding the weakest player in Germany's crowded wireless market, and facing extra costs associated with loan repayments and the ongoing development of MobilCom's 3G network.

Arguments over the scale of Schmid's original 11bn euros ($10.7bn) 3G plan were at the heart of France Telecom's decision to oust the former CEO earlier this year. The company is now at daggers drawn with Schmid, who is suing France Telecom for reneging on an earlier agreement to buy him out.

At the same time MobilCom, under France Telecom direction, is also suing Sybille Schmid-Sindram for the return of more than 70m euros ($68.03m) it alleges Schmid's wife's company acquired via an illegal stock transaction.

Clearly Bon, who paid 3.74bn euros ($3.63bn) for the 28.5% stake in MobilCom two years ago, believes that there is no sense in throwing good money after bad. MobilCom owes some 6bn euros ($5.83bn), including 4.5bn euros ($4.37bn) in bank loans which France Telecom agreed to secured against its own shares in June, and still faces a huge bill to go ahead with its 3G plans. Its association with France Telecom has contributed to a 70% slide in the telcos own share price this year, and Bon would clearly like to cut these ties at the earliest opportunity.

Even if France Telecom does decide to cease funding MobilCom, it is still left with the responsibility of meeting MobilCom's 4.7bn euros ($4.57bn) of bank debt obligations, or risk wrecking its own credit worthiness. France Telecom cannot afford to take this risk, with 15bn euros ($14.58bn) of bank loans of its own coming due next year, and possible cash shortages of 5bn euros ($4.86bn) and 20bn euros ($19.4bn) forecast for 2003 and 2004 respectively.

In the meantime, Bon has been working to renegotiate 1.1bn euros ($1.07bn) of vendor financing that Nokia and Ericsson agreed to in connection with MobilCom's 3G equipment procurement, and the 4.7bn euros ($4.57bn) in banks loans to the company. So far Nokia has agreed to write-off 300m euros ($291.5m) owed by MobilCom, but has said it will not offer any further financing to the company, but the situation with MobilCom's creditor banks remains to be resolved, and may hold the key to Bon's future tenure at France Telecom.

Indeed, some observers believe that Bon's position at France Telecom is already on the agenda of a board meeting scheduled for today, at which the company's biggest stake holder, the French government, will decide on what to do next.

If it backs Bon it will likely confirm the opinion of the company's other investors that Bon is merely a government place man, and harden their conviction that if France Telecom is to be trusted in future, the government must sell its 56% stake in the company, or at least reduce it to a point where it cannot artificially cushion that company from adopting truly market driven strategies.

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