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UPDATE 3-Swiss watchdog vetoes Orange, Sunrise merger

* Swiss competition regulator scuppers merger

* Says merger would give dominant position in mobile market

* TDC shares fall 3.3 pct, France Telecom down 1 pct

* Swisscom shares off 1.8 pct

(recasts, adds analyst, TDC chairman comment)

By Leila Abboud and John Acher

PARIS/COPENHAGEN, April 22 (Reuters) - Swiss watchdogs surprisingly blocked mobile operator Orange FTE.PA from buying rival Sunrise, setting back the French group and hampering Sunrise parent TDC's efforts to streamline and list shares.

France Teleom's Orange and Denmark's TDC TDC.CO had wished to join forces to take on dominant player Swisscom SCMN.VX but Swiss anti-trust authorities rejected the proposal for fear it would reduce competition and keep prices high.

France Telecom and TDC said they were surprised by the decision and were assessing their options, including an appeal.

Analysts split on the potential fallout for France Telecom.

“Switzerland accounted for only 220 million euros ($295.7 million) of France Telecom’s overall operating income of 16 billion last year,” said one Paris-based analyst.

“The decision isn’t good news, but it won’t alter the profitability of France Telecom this year or next.”

Another analyst took a more negative view.

“The main negative is for France Telecom because TDC is bigger in Switzerland,” he said, adding that Orange was struggling in Switzerland to become No. 2.

“This could in the end be positive for TDC if they can position themselves as the clear No. 2 -- and more of a struggle for France Telecom strategically,” he said. Margins at Sunrise have surpassed those in TDC’s main Nordic business.

TDC’s shares were down 3.3 percent to 235 kroner, while France Telecom’s shares slipped 1 percent to 16.995 euros by 1318 GMT. Swisscom stock fell 1.8 percent.

TDC had said the Sunrise sale was a natural step in its strategy to focus on the Nordic markets, and analysts had seen it as part of preparations by TDC’s private-equity owners to launch a public offering of TDC stock, possibly this year.

TDC was supposed to get 1.5 billion euros for the sale.

M&A FOCUS SHIFT?

Thomas Wehmeier, an anlyst at Research firm Informa Telecoms & Media, said TDC would continue to try and grow the business in Switzerland while hoping to find a buyer.

“The strategy (for TDC) is to exit and focus on its core market, the Nordic region, but it will be difficult to find a buyer who would want to enter the Swiss market,” Wehmeier said.

The chairman of TDC said the group’s owners could still go ahead with a stock offering.

“The strategic analysis continues,” Vagn Sorensen told Reuters. “One possibility is a refloating on the bourse, and that is still a possibility after the decision in Switzerland.”

A consortium of five private equity firms -- Apax Partners, Blackstone Group BX.N, Kohlberg Kravis Roberts [KKR.UL], Permira Advisers [PERM.UL] and Providence Equity Partners -- owns 87.9 percent of TDC's stock.

Analysts were looking to see if the Swiss move marked a tougher line in general from regulators.

“This raises questions for the sector as a whole if regulators begin to scrutinise consolidation deals more closely,” said Michael Kovacocy, telecoms analyst at Daiwa Securities. “It might lead companies to focus M&A more on infrastructure and less on retail operations.”

Informa’s Wehmeier argued that the Swiss market with only three operators did not represent the European region and that competition had come late to the Swiss.

“If you look at the strategy of most incumbent operators in the region they have been pretty clear in underlining support for in-market consolidation and I think that will remain.”

Orange forged a joint venture with Deutsche Telekom DTEGn.DE last year in Britain to alleviate competition in that tough market. That deal was approved by regulators.

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