State comes to T?l?com's aid

France Télécom yesterday took the wraps off an ambitious package to refinance its crippling debt burden - backed by €9bn (£5.7bn) from the French government.

Faced with a €70bn debt mountain, the group is planning to raise €15bn from shareholders and wants to boost its cashflow by cutting capital expenditure, axing next year's dividend and reducing the workforce by 22,000 through natural wastage.

New chairman and chief executive Thierry Breton, brought in by the French government two months ago, said: "The measures we are about to take demonstrate that France Télécom is once again capable of taking the initiative. Our first priority is to loosen the financial grip in which we are now caught."

Centrepiece of the three-year plan is the €9bn from the government which owns about 55% of the company's shares. The state's shares will be put into a holding company which will raise €9bn to lend to France Télécom on what are described as commercial terms.

The money will be repaid in new France Télécom stock when the company formally launches a cash call on shareholders to raise another €6bn. The advantage of the scheme, which will face stiff scrutiny from Brussels to determine whether it constitutes state aid, is that France Télécom gets the €9bn now. That will enable it to meet forthcoming debt repayments, allowing it to choose its own time to tap the other investors for cash.

France Télécom also warned that it would be taking additional write-downs of up to €7bn this year but said it expected revenues to be up to 9% higher than in 2001.

France Télécom shares rose more than 16% to just under €19 on the refinancing news.

Raymond Hill at credit rating agency Fitch said the new management had "a solid focus on costs".

He said: "We are satisfied there is a realistic chance of reaching their cash generation targets." Fitch has moved its outlook for France Télécom to positive and said it could raise its rating if it met its refinancing targets.

Investment house Merrill Lynch upgraded the shares from "neutral" to "buy" and set a target price of €21.

At their peak in March 2000 the shares touched €219 as the group spent more than €100bn on acquisitions and third generation mobile phone licences.

But, as finance minister Francois Mer noted yesterday, because the state was legally bound to retain control of the company, France Télécom was forced to fund its spending spree with cash rather than shares, pushing its debt burden to unprecedented levels.

Mr Mer said that the state would be prepared to give up control if France Télécom's strategic development required it. That would need legislation and could lead to conflict with the unions which are already concerned about plans to privatise Electricité de France.

The European commission has already warned it will look at the state's role in the refinancing.