Global Insight Perspective | |
Significance | France Telecom's interest in One Austria is ironic, considering that the operator is selling a similar operation in the Netherlands due to its lack of prospects. |
Implications | Although France Telecom will take a 35% stake in the Austrian telco, the deal is clearly a disguised private equity takeover and the new owners are bound to bring on the typical management practices associated with private equity firms. |
Outlook | France Telecom's partnership with a private equity firm could well shape future acquisitions in the telecoms sector. If the marriage prospers, it may encourage a trend of partnerships, with telcos bringing the expertise plus the brand, while private equity companies raising the funds for the acquisitions and assisting the debt-laden telcos to expand. |
France Telecom is set to plant its Orange brand in Austria as its consortium with private equity player Mid Europa Partners takes over the Austrian mobile telco, One GmbH. In a statement, France Telecom said its consortium will take over One GmbH in a deal valued at 1.4 billion euro (US$1.88 billion). The deal, which is expected to be completed by the end of June 2007, will give the French giant a 35% stake in the Austrian operator while private equity group Mid Europa Partners will control the remaining 65%. Endorsing its partnership with Mid Europe, France Telecom extolled the new co-operative approach between an operator and a private equity fund. "This partnership constitutes a new approach of co-operation between an operator and a private equity fund which allows to combine the operational expertise of a leading telecom operator and the recognised know-how of a private equity fund strongly active in this sector and this region," the company said in a statement (see Austria: 25 May 2007: France Telecom Remains in Race for Austrian Mobile Operator, One).
In winning the deal, France Telecom relied on its pre-emptive right as an existing shareholder. Presently, the French operator has a 14.45% stake in One GmbH, formerly known as Connect Austria. Other One GmbH shareholders said they have agreed to sell their stakes in the company. German utility E.ON AG holds a 50% stake, while the Danish telecoms group, TDC, controls 15% and Norwegian telco Telenor holds a 14.45% stake. In separate statements, E.ON said the deal will give it a cash inflow of 550 million euro, TDC said it will get 213 million euro, while Telenor said it expects proceeds of 190 million euro. France Telecom said the transaction will not lead to any cash outlay and will not have any impact on its net debt ratio targets. The winning consortium beat other rivals, including Dutch telco KPN, to win the bid for One (see Austria: 24 May 2007: KPN Eyes Austrian Mobile Company One and France - Austria: 7 June 2006: France Telecom Set to Buy ONE).
Outlook and Implications
Between Austria and the Netherlands: France Telecom's involvement in the takeover of One is ironic considering the company is disposing of a similar operation in the Netherlands. With end-2006 mobile penetration at 113% and 109% for Austria and the Netherlands, respectively, both countries already have highly mature mobile markets. Admittedly though, One has a better standing compared to Orange Netherlands. The Austrian operator is the third-largest in the country, behind Mobilkom Austria and T-Mobile, and has a 20% market share. In contrast, Orange Netherlands is the fourth-largest in the Netherlands, with about an 11% market share. In reality though, France Telecom is pulling its Orange brand from one Western European market while establishing the brand in a similar Western European market.
Private Equity Bears the Risks: Although a 35% stake still leaves France Telecom with sizeable risks in Austria, the deal is clearly a disguised private equity takeover. Mid Europa Partners is joining fellow private equity firms attracted by the high cash flows of telecoms operators. France Telecom's stake is akin to a brand licensing deal, with the French giant retaining and expanding its Orange brand worldwide with its attendant benefits. The telco may also be hoping to retain a foothold in the Austrian operator, with the possibility of taking control in the future. Similarly, the partnership with Mid Europe Partners presents an opportunity for an established European telecoms giant to collaborate with a private equity player in the running of an acquired telecoms asset. Given the propensity of private equity players to overhaul and boost profitability in their acquisitions—and subsequently cash in on them afterwards—France Telecom may be setting its eyes on a big profit when the business is sold. If the marriage prospers, it may encourage a trend of partnerships, with telcos bringing the expertise plus the brand and private equity firms raising the funds for the acquisitions and assisting the debt-laden telcos to expand.