France Telecom Quashes Deutsche Telekom Merger Rumours After Deutsche Bank Increases Stake

France Telecom has stated that it has no plans for a merger or any further synergies with German rival Deutsche Telekom following an increase in Deutsche Bank's shareholding in the French incumbent. The French CFE-CGC/UNSA union had called for a meeting with France Telecom, saying the German bank's move to boost its holding to over 5% of the operator represented a "profound change" in the balance of the shareholding, and feared the move was a precursor to consolidation operations liable to "change the world of telecoms in Europe". However, a France Telecom statement has declared emphatically that there is no plan to bring together France Telecom and Deutsche Telekom, adding that the two telecom operators have only met to discuss specific topics as the need has arisen, such as the merger of the Orange UK and T-Mobile UK units.

The French stock market regulator, Autorité des Marches Financiers, revealed yesterday (6 September) that Deutsche Bank's stake in France Telecom had risen to 5.07% with as many voting rights after it bought shares outside the market. The French state continues to hold a 13.47% stake in France Telecom, while the state-controlled FSI strategic investment fund holds a further 13.67%.

Outlook and Implications

• France Telecom Continues to Seek European Synergies: The union's fears of a larger merger are likely to have been fuelled by the recent combination of France Telecom and Deutsche Telekom's U.K. mobile units in reaction to the intense competition in the mobile sector and as a preferable solution to exiting the market altogether. The merger, known as Everything Everywhere (EE), came into effect on 1 July 2010, creating the country's biggest mobile operator ahead of Telefónica's O2 and Vodafone, with more than 30 million customers and an estimated market share of 37% (see United Kingdom: 12 May 2010: Orange UK and T-Mobile UK Merger Named "Everything Everywhere"). The combined business has said it will keep the Orange and T-Mobile brands until at least 2012. France Telecom's Swiss unit, Orange Switzerland, has also recently seen the failure of its planned merger with TDC's Sunrise, which was an attempt to allow both operators to compete better with the dominant incumbent, Swisscom (see Switzerland: 4 June 2010: France Telecom and TDC Swiss Merger Dead in the Water As Appeal Is Withdrawn). However, the U.K. and Swiss markets are extreme and polarised examples of intense competition and the failure of competition, and do not reflect the huge majority of markets in which France Telecom and Deutsche Telekom operate. France Telecom has recently seen its Swiss merger fall foul of regulatory intervention, and similar efforts in markets that it shares with Deutsche Telekom would likely meet the same fate. Furthermore, the large number of European markets in which both operators are present would no doubt see the EU step in to prevent damage to competition in the bloc.

• France Telecom Moves Towards Recovery: France Telecom has recently set out a strategy to offset sluggish demand and tough competition in European markets by focusing on growth in emerging regions. Chief executive Stephane Richard revealed his new five-year plan at the end of the first half of the year, which aims to grow its client base by 50% to 300 million by 2015, largely via acquisitions in emerging markets (see France: 6 July 2010: France Telecom Aims for 50% Customer Growth by 2015 with New Five-Year Plan). However, the incumbent recently revealed that its second-quarter earnings dropped 2.6% year-on-year (y/y) as it continues to struggle against the global economic downturn and rises in European regulation. In France, recent figures show broadband customers were up some 9% y/y in the first half of 2010, with the bundled services sector in particular showing significant growth, driving prices down and increasing competition. French telecoms operators SFR and Bouygues Telecom have both announced single-digit earnings before interest, tax, depreciation, and amortisation (EBITDA) increases in the first half of the year as strong growth in the broadband sector boosted fairly stagnant performance elsewhere (see France: 2 September 2010: French Operators SFR and Bouygues See H1 EBITDA Growth on Strong Broadband Performance). Meanwhile, Iliad revealed that its first-half EBITDA rose by 27% y/y as performance at its struggling Alice broadband unit showed a significant improvement, and the fixed-line player is predicting double-digit EBITDA growth to continue throughout the year. Elsewhere, France Telecom has announced this week that its Polish unit, Telekomunikacja Polska (TP), has been ordered to pay 396 million euro (US$531 million) to Danish Polish Telecommunications Group (DPTG) to settle a dispute centred on traffic volumes on the group's fibre-optic telecom network in the country. However, the French incumbent says its financial outlook for the year will not be affected by the decision (see France – Denmark - Poland: 6 September 2010: TP Ordered to Pay US$531-Mil. Fine in DPTG Dispute).

• Deutsche Telekom Maintains Modest Expansion Goals: Deutsche Telekom has recently announced that second-quarter net revenue was down 4.4% y/y, which it chiefly blamed on the deconsolidation of T-Mobile UK (see Germany: 5 August 2010: Deutsche Telekom's Q2 EBITDA Margin Stable at 32.3%, Sees Improvement in U.S.). Recent reports have also suggested the German incumbent will lose its exclusivity contract for the iPhone as Vodafone and O2 will start to offer the handset on certain contracts before the end of the year (see Germany: 3 September 2010: Deutsche Telekom Faces Loss of iPhone Exclusivity in Germany—Reports). However, Deutsche Telekom's rural Long-Term Evolution (LTE) roll-out is well under way, with the operator aiming to achieve 90% coverage ratio in more than 1,000 regional administrative areas that have no broadband service by the end of 2016 (see Germany: 2 September 2010: Deutsche Telekom Begins Rural LTE Deployment in Germany).