[eccr] From The Economist: Cegetel and the backwardness of France's mobile-phone industry

Title: From The Economist: Cegetel and the backwardness of France's mobile-phone industry

The French exception

Oct 31st 2002 
>>From The Economist print edition
Cegetel and the backwardness of France's mobile-phone industry

DIVORCE battles can be extremely acrimonious, particularly when it comes to custody of children. The tussle between Vodafone, the world's largest mobile-phone operator, and its erstwhile partner Vivendi Universal, a troubled French conglomerate, is no exception. The two firms are fighting over Cegetel, France's second-largest telecoms firm, in which British Telecom (BT) and SBC, an American regional operator, also have stakes. Vodafone has offered to buy out BT and SBC for a total of euro6.3 billion ($6.1 billion), which would give it control of Cegetel and its mobile-phone subsidiary, SFR. Vodafone has also offered to buy Vivendi's 44% stake for a further euro6.8 billion, an offer that was rejected this week. Cash-strapped Vivendi, with euro19 billion in debt, seems to want to hold on to Cegetel at all costs. Why?

For Vodafone, control of Cegetel (and thus of SFR) would be a valuable prize. Over the 1990s, Vodafone's empire-building chief executive, Sir Christopher Gent, established his company as the main competitor to the mobile operations of Europe's incumbent telecoms firms. He did this with the help of local backers, most of which later sold out, leaving Vodafone in control of an impressive international network. Except, that is, in France, which is now the largest and most obvious hole in Vodafone's coverage ³footprint².

Vodafone's partnership with Vivendi, which has since fallen apart, and the involvement of BT, a competitor in Britain, meant that Vodafone did not take the hands-on approach at SFR that it took in other countries. Partly as a result, France fell behind other European countries in the adoption of mobile phones (see chart). With no vigorous competitor for France Telecom's mobile-phone arm, Orange, the market ended up ³grossly underdeveloped², says Stephen Pentland of Spectrum, a consultancy. But France's backwardness now represents an opportunity. As the market reaches saturation across Europe, there is room for growth in France: hence Vodafone's wish to control SFR.

Vivendi, however, is reluctant to cede control of Cegetel, SFR's parent company. Cegetel is a cash cow, unlike the rest of Vivendi's empire, so it makes some sense to hold on to it. But doing so would mean selling other assets and taking on even more debt. Yielding to Vodafone, on the other hand, would let Vivendi pay down some debt. But it would also destroy the central plank of its strategy, which was based on the convergence of media, entertainment and telecoms. (That idea, along with its champion, Vivendi's former chairman, Jean-Marie Messier, has already been largely discredited; ominously, French prosecutors this week launched an inquiry into the accuracy of Vivendi's financial statements during his tenure.) As it restructures, it is not clear which bits of Vivendi will stay, and which will go. Thus, says Damien Chew, an analyst at ING Barings, it is too soon to tell if Vivendi really wants to keep Cegetel, or simply hopes to get Vodafone t
o make a better offer.

But there is also a conspiracy theory doing the rounds. If Vodafone gains control of Cegetel, the company with the most to lose is France Telecom. Its Orange subsidiary would suddenly face real competition on its home turf, in the form of an invigorated SFR. Orange is one of the key props supporting France Telecom as it tries to reduce its own euro70 billion debt pile. If Vodafone gained control of Cegetel, it would be bad news for French bankers, portfolio managers, and the government, which owns 56% of France Telecom. Keeping Cegetel in French hands, in short, may be more than a matter of national pride: it could be a patriotic duty. 

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