France Telecom defends TeliaSonera plan

By Astrid Wendlandt

PARIS (Reuters) - France Telecom on Friday defended its possible takeover of Nordic rival TeliaSonera, as its shares hit an 8-month low on concerns the deal would be risky and could destroy shareholder value.

The French telecoms operator, which trades now mainly as Orange, said TeliaSonera would bring economies of scale, strengthen its position in Western Europe and expand its footprint in emerging markets such as Russia and Turkey.

"We believe TeliaSonera represents a strategic opportunity," France Telecom Finance Director Gervais Pellissier told reporters on a conference call. "Critical mass is an important factor."

"France Telecom and TeliaSonera are complementary, share a common strategic vision and both have significantly transformed their business models," he added.

France Telecom stock fell nearly 3 percent early on Friday and by 0800 GMT it stood 1.8 percent lower at 19.46 euros, after touching a more than 8-month low.

"We believe that an acquisition of TeliaSonera or Telenor by France Telecom would be value destructive, but are more worried that FT's interest in this deal signals larger weakness in the domestic business," Bernstein Research wrote in a note.

"To make matters worse 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."

DIVIDEND PLEDGE

France Telecom stressed negotiations had not started and it had not given itself a deadline for a deal, which would create Europe's largest phone company by sales and its third-biggest by market capitalization.

It also pledged to continue increasing its dividend, which was a source of concern, but its plans were coolly received by investors.

Several brokers cut their ratings for France Telecom including Societe Generale, Dexia and Oddo Securities.

Since Le Figaro reported on Wednesday that the French telecoms operator could acquire TeliaSonera, France Telecom shares have fallen more than 10 percent.

Analysts have criticized the deal, saying it would not create significant savings and warned France Telecom's track record with cross-border acquisitions was unimpressive.

Pellissier said the company was also weighing other options including a possible tie-up with Telenor of Norway.

France Telecom said if the TeliaSonera deal went ahead it would finance it with equity and cash, meaning it might not meet its target of keeping the ratio of debt to gross operating margin under 2.