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PARIS (Dow Jones) European telecoms analysts were poring over maps of the continent Wednesday after a report in French daily Le Figaro floated the idea of a giant merger between France Telecom and Nordic operator TeliaSonera.

Analysts began considering the pros and cons of a possible deal as the speculation weighed on France Telecom's stock and sent TeliaSonera shares sharply higher.

A France Telecom spokeswoman declined to comment explicitly on the report but highlighted the merger and acquisition objectives the group outlined in February, which include reinforcing its footprint in emerging markets, and strengthening its activities in Western Europe when appropriate.

The French giant "will not undertake any initiative which will not create value for shareholders or which will modify the commitments regarding our mid-term debt-to-Ebitda ratio and our cash-return policy," the spokeswoman said.

France Telecom shelled out tens of billions of euros on acquisitions, including the UK's Orange at the start of the current decade, sending its debt soaring.

TeliaSonera declined to comment on the report.

A takeover of TeliaSonera by France Telecom would follow other recent deals between European incumbents. Last year, Spain's Telefonica took a stake in Telecom Italia through a holding company.

Meanwhile, Deutsche Telekom recently agreed to buy into Hellenic Telecommunications Organization, Greece's largest telephone company, which is known as OTE.

"I think France Telecom is absolutely in the mood to look into European consolidation," said a banking source with knowledge of the sector.

"Deals in emerging markets are expensive and complicated in terms of governance," the source said. The source added that, to their knowledge, no banks had so far been recruted to advise on a possible deal.

Taking control of TeliaSonera would give France Telecom increased exposure to emerging market growth through the group's assets in Eastern Europe and Turkey, said Dexia analyst Rob Goyens.

The lack of geographical overlap between the two operators reduces the risk of antitrust concerns, but also means potential synergies are weak, Goyens said.

Dexia's Goyens, who has an add rating on both stocks, noted that TeliaSonera is nonetheless mired in restructuring efforts in its fixed and mobile operations in Sweden and Finland through 2009, meaning France Telecom would acquire a "restucturing story" that would add operational complexity to any tie up.

Government involvement could add further political complications. The French government holds 27.4% of France Telecom's capital and the Swedish and Finnish governments own 37.3% and 13.7% of TeliaSonera respectively. The Swedish government is selling off its stake in Teliasonera as part of its $33.8 billion privatization drive, but so far has sold off only a small part of its holding.

"The saying 'three is a crowd' would certainly bear relevance," Goyens said.

According to the report in Le Figaro, France Telecom would swallow up TeliaSonera through a share swap, a plan supported by the French government.

French government spokesman Luc Chatel said the subject had not been addressed Wednesday's weekly cabinet meeting. "The government will express itself when the time comes," Chatel said.

Mia Widell, a spokeswoman for the Swedish government, declined to comment on "market speculation," adding that the government has the goal of selling its assets although no timetable has been set.

Based on Deutsche Telekom investment in OTE, Goyens estimates that TeliaSonera would be worth EUR34.3 billion.

If a deal went through, France Telecom would also inherit TeliaSonera's complex shareholding conflicts in Russian operator Megafon and Turkey's Turkcell Iletisim Hizmetleri.

The prospect of a deal was not welcomed by investors in France Telecom. At 1115 GMT, shares in the company were down EUR1.05, or 4.7%, to EUR21.15 compared with an 0.7% rise in France's benchmark CAC-40 index.

A tie-up is "possible," one analyst said, adding: "I don't like the sound of it." Other analysts were more skeptical, suggesting the report in Le Figaro "lacked substance."

The speculation boosted TeliaSonera shares, though. At 1124 GMT, they were up 8.7% or SEK3.90 at SEK48.70, in a broadly higher Swedish market.

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

(Olivier Hensgen and Alice Dore in Paris and Adam Ewing in Stockholm contributed to this report.)

(END) Dow Jones Newswires

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