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French win $40B Orange
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May 30, 2000: 2:25 a.m. ET
France Telecom to form Europe's No. 2 mobile firm after buying UK player
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LONDON (CNNfn) - France Telecom agreed Tuesday to buy U.K. mobile-phone operator Orange from Vodafone AirTouch in a long-anticipated deal worth £26.9 billion ($40.3 billion) in cash, stock and assumption of debt, creating Europe's second-largest cellular-phone company.
The companies will unite their mobile phone businesses under what will become a separately listed company run by Orange Chief Executive Officer Hans Snook and Deputy CEO Graham Howe. France Telecom said it plans to take Orange public with listings in London, Paris and New York by the end of this year or early in 2001 - possibly raising more than $10 billion for its coffers.
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CNN's Diana Muriel reports on the deal and the global ambitions of new Orange
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"The acquisition of Orange is a major step in France Telecom's international strategy to become a European leader and global player," France Telecom's Chief Executive Officer Michel Bon said.
Paris-based France Telecom is paying £25.1 billion for Orange -- £13.8 billion in cash and £11.3 billion in shares -- and will take on £1.8 billion in debt. In addition, France Telecom faces an imminent bill for the £4.1 billion that Orange last month agreed to pay for a license to offer third-generation mobile-phone services in Britain.
Orange has changed hands twice in less than year - a symptom of the rampant consolidation in the telecommunications industry in the past two years. Hong Kong giant Hutchison Whampoa sold Orange to Mannesmann last year for about $36 billion before the German company was itself gobbled up by Vodafone for $173 billion earlier this year.
Vodafone AirTouch (VOD) needed to sell Orange as a condition for winning European Union regulators' approval for its buyout of Mannesmann. Dutch telecom operator Royal KPN and U.S.-based WorldCom were also "very interested" in Orange, Reuters reported Vodafone as saying. Spain's Telefónica also discussed with its investment bankers an offer for Orange.
'Reasonable, not cheap'
"It's a reasonable price, but we're not going to tell you it's cheap," said France Telecom Chief Financial Officer Jean-Louis Vinciguerra at a news conference. While France Telecom's price tag is greater than the $36 billion Mannesmann paid to buy Orange last year, the U.K. mobile operator, with about 6 million customers, has roughly twice as many subscribers now as it did then, he said.
Vinciguerra said Mannesmann's purchase of Orange had valued each subscriber at  9,517 ($8,823), compared to 6,741 that France Telecom is paying in the deal announced Tuesday. He added that the stock market now values most publicly traded mobile operators at about 5,000 per subscriber.
Vinciguerra told the news conference the planned initial public offering would value the enlarged Orange at up to 150 billion. France Telecom would aim to sell 10 to 15 percent of the company in the initial offering.
Unveiling his company's annual earnings report Tuesday, Vodafone CEO Chris Gent said his company got an extremely good price for Orange given current market conditions, Reuters reported. 
Vodafone will own just under 10 percent of France Telecom, but will not have board representation. France Telecom will use the proceeds from its planned IPO of Orange to buy back the majority of the British firm's stake.
Shares of France Telecom (PFTE) dropped 2 percent in Paris Tuesday. Vodafone, which separately reported a 30 percent jump in its annual earnings, rose 5.3 percent in London.
Savings expected
France Telecom said it expects the purchase of Orange to have no impact on its earnings in 2001, although it would boost profit after that. It expects to boost earnings by generating savings of 800 million before interest, taxes, depreciation and amortization by 2003, officials said.
The transaction, which is expected to be completed by July or August, requires European Union regulatory clearance. France Telecom must also seek its shareholders' approval to issue the new shares that it will use as part of the payment for Orange.
The French government, which executives said have backed the Orange purchase, will see its stake in France Telecom drop to 54 percent from 61 percent when the former state-owned monopoly issues shares to Vodafone.
 France Telecom telegraphed its intention to nab Orange soon after the Vodafone-Mannesmann merger was struck. France Telecom's exclusive right to hold talks with Vodafone on Orange, which executives said lasted 15 days, expired Monday night.
Bon told CNNfn.com that the French telecom giant stepped up its effort to purchase Orange after NTL, a U.K.-based cable company in which France Telecom has a 25 percent stake, quit the auction for a next-generation U.K. mobile-phone license.
Aside from France and Britain, the enlarged Orange will have operations in 10 countries, including Germany, Belgium, the Netherlands, Denmark and Romania. It will also have alliances in another seven, including Italy, Austria, Switzerland, Jordan and Egypt.
Next stop, America?
The U.S. market continues to be a gap in France Telecom's coverage as it seeks to build a global brand for Orange. Snook said he is ready to keep all his options open - including strategic partnerships or licensed franchises in the consolidating U.S. mobile-phone market.
Vodafone is already there: it became the world's largest mobile-phone company last year when it purchased AirTouch Communications for $56 billion. Vodafone said Tuesday that Verizon, its mobile phone venture with regional U.S. telephone operator Bell Atlantic (BEL: Research, Estimates), would hold a public share offering by the end of this year.
"If you're going to challenge Vodafone globally, you're going to have to be in North America," said Snook at the news conference. "If the opportunity presents itself, we are going to be there."
But France Telecom has a poor track record in its alliances in the U.S. market, having participated in a three-way partnership with Sprint and Deutsche Telekom that folded last year when the companies sought new partnerships. The French operator indicated Tuesday its immediate priority was to absorb its new European businesses.
"If you want to exist in the U.S. market, you have to be strong in your home market," said Bon.
So far, there are few U.S. mobile phone operators with a coast-to-coast footprint, executives at France Telecom admitted. Tokyo-based mobile phone giant NTT DoCoMo may be ready to grab a piece in one such player, according to a Japanese media a report Tuesday that said it might buy up to 20 percent of VoiceStream Wireless (VSTR: Research, Estimates) for as much as $5 billion. 
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France Telecom
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