FOCUS: French Telecom Sector Waits On 4th License Outcome

PARIS -(Dow Jones)- France wants to increase competition in the mobile phone market by offering a fourth operator license, but the price tag and logistical issues could torpedo the move.

The EUR619 million ticket is the same as the three current holders paid - they control 97% of the market - and might be enough to deter Free, the only company that has expressed interest in the license. It's cagey about what kind of offer it might submit by the July 31 deadline.

Free, owned by Iliad, is pushing to have the price reduced or spread out over a longer period. Chief Financial Officer Olivier Rosenfeld told a recent industry conference that the French government isn't showing "a clear willingness" to change the conditions.

Rosenfeld said Free's decision about whether to apply for the license would depend on discussions with the French government and the sector regulator.

Cable operator Numericable, controlled by private equity firm Cinven Group, was also seen as a potential candidate for the license, having expressed interest in adding mobile telephony to its TV, Internet and fixed-line packages.

That possibility evaporated Thursday when Bouygues Telecom, a subsidiary of Bouygues and one of the three established operators, said it had agreed to sell network capacity to Numericable.

Numericable will now be able to provide mobile-phone offerings as a so-called virtual network operator. A spokesman for Numericable declined to comment.

If Free decides to submit an application for the license demanding a reduced price, the chances of the government accepting it appear slim. The Conseil d'Etat, France's highest administrative court, rejected on July 11 a legal challenge by Free to have the candidature process restarted with a modified price.

The three current license holders - France Telecom's Orange, Vivendi subsidiary SFR, and Bouygues Telecom - are keeping a close watch on how the process plays out.

"The three mobile network operators, the first two in particular, hold a very strong position," Paul Champsaur, president of French regulator Arcep, said in a speech in early July.

After Bouygues obtained its license in 2002 for a lower price than Orange and SFR had previously paid, the government amended the terms of the other two operators' licenses, bringing them in line with the Bouygues deal.

Bouygues said the move constituted an illegal state subsidy to its rivals and took the case before the European Court of First Instance. On July 4 the court rejected the company's claims.

Earlier this week Frank Esser, the chairman and chief executive of SFR, told French daily Les Echos: "The conditions of attribution must remain the same as ours."

In the recently formed government, it appears the final decision on the fourth mobile license will fall to Herve Novelli, the junior minister for industry and foreign trade.

When asked whether Novelli would be willing to reduce the price of the license, his spokeswoman didn't return calls for comment.

Price is not the only issue, though, as logistical problems could also intervene.

Exane BNP Paribas analyst Antoine Pradayrol said in a note that the new operator's ability to roll out base stations in crowded urban environments is a "key uncertainty."

A fourth mobile license would weigh on the margins of Orange, SFR and Bouygues, analysts say.

Javier Borrachero, an analyst at ING, said in a note that the entry of a fourth mobile operator could reduce Orange France's earnings before interest, taxes, amortization and depreciation by 8.2% within five years, shaving over a euro off France Telecom's share price.

"We note that at this stage no credible operator has emerged and the deadline is coming up soon," a France Telecom spokeswoman told Dow Jones Newswires.

A spokesman for Bouygues, the company that stands to lose the most from the arrival of a fourth operator, according to analysts, because it's in third place in the current hierarchy, declined to comment.

Rob Goyens, an analyst at Dexia, said a fourth mobile network operator would jeopardize "the chances of Bouygues Telecom's divestment" and hamper its selling price.

Bouygues is rumored to be thinking of selling its telecoms division, although the company has denied it.

The failure of a fourth operator to enter the market, which many analysts see as the most likely scenario, would leave open the question of what French authorities would do instead to spur competition in the French mobile market.

One way would be for the regulator to reassess the pricing conditions for so-called virtual operators who purchase network capacity wholesale from the established operators.

There are currently about 12 virtual operators in France that share some 3% of mobile customers.

That route would provide an alternative way for Free to enter the mobile market, as Numericable has chosen to do, by setting up operations as virtual mobile provider.

By Jethro Mullen, Dow Jones Newswires; 33 1 4017 1738; jethro.mullen@dowjones.com

(END) Dow Jones Newswires"

Posted to the site on 26th July 2007