France Telecom defended its project to take over Nordic peer TeliaSonera on Friday as its shares hit an eight-month low on concerns the deal would be risky and destroy value. The French telecoms operator, which trades as Orange, said TeliaSonera would strengthen its hand when negotiating with handset vendors such as Nokia and Internet giants including Google and Yahoo.
It would also create economies of scale and expand its footprint in emerging markets such as Russia and Turkey. But it stressed negotiations had not started and it had not given itself a deadline for a deal that would create Europe's largest telecoms group by sales and third largest by market capitalisation.
"We believe TeliaSonera represents a strategic opportunity," France Telecom Finance Director Gervais Pellissier told reporters in a conference call. "France Telecom and TeliaSonera are complementary, share a common strategic vision and have significantly transformed their business models."
The French operator pledged to continue increasing its dividend, which was a source of concern, but its plans, overall, were coolly received by investors. France Telecom stock fell at one point by nearly 3 percent on Friday. It was down 1.23 percent at 19.64 euros in early afternoon trade, having touched an eight-month low. TeliaSonera shares were up 3.12 percent at 51.25 Swedish crowns.
Since Le Figaro newspaper reported on Wednesday that the French telecoms operator could acquire TeliaSonera, France Telecom shares have lost 12 percent. "I think the shares are falling because it has been a surprise ... investors do not like uncertainty," Pellissier said in another conference call with journalists. Several brokers cut their ratings for France Telecom including Societe Generale, Dexia and Oddo Securities.
The cost of insuring France Telecom's debt against default rose on uncertainties over the potential deal. Five-year default swaps were around 4 basis points wider at 102.5 basis points, a London-based trader said."It looks like their (credit) rating may be under pressure if they buy TeliaSonera," he said.
Analysts have criticised the deal, saying it would not create significant savings and warned France Telecom's track record with cross-border acquisitions was not impressive. "Orange has traditionally been a weak owner of non-domestic European assets, so we worry that there will be an incremental destruction of value if they take over these assets," Bernstein Research wrote in a note.
"We are more worried that FT's interest in this deal signals larger weakness in the domestic business." If the TeliaSonera deal went ahead, Pellissier said, France Telecom would finance it with equity and cash but added that the company had not decided on the make-up of a potential offer.
Pellissier also warned the French telecoms operator's ratio of debt to gross operating margin could reach 2.5 this year if it completed the take-over. It would return to its target of less than 2.0 within two to three years, he added. TeliaSonera's net debt of $5.9 billion at the end of 2007 was much smaller than France Telecom's $60.6 billion. TeliaSonera declined to comment but said that if a bid came along it would have to present it to the board.