Télécom hangs up on MobilCom

France Télécom yesterday seemed to have soured Franco-German relations as it put 5,000 German jobs on the line in the run-up to the country's election by ending its MobilCom wireless joint venture.

MobilCom was last night on the brink of insolvency as debt-laden France Télécom, in which the French government has a 55% stake, stopped funding the business following a late board meeting on Wednesday night which saw the resignation of the chairman and chief executive, Michel Bon.

MobilCom, which has had an uneasy relationship with its French backer, accused France Télécom of breaching its contractual obligations. The company is considering legal action, claiming compensation for damages.

Analysts fear that Orange, which is majority owned by France Télécom, could be saddled with hundreds of millions of pounds worth of equipment contracts by MobilCom. But Orange finance director Simon Duffy yesterday denied that the company had any liability.

"This is a clean break as far as we are concerned," he said.

News of the withdrawal of funding for MobilCom was top of Germany's political agenda last night, with Chancellor Gerhard Schröder's govern ment pledging support for the stricken mobile phone operator.

France Télécom's decision comes little more than a week before the German general election, and a spokeswoman for Mr Schröder's administration said it was considering offering the business credit guarantees.

"As far as we know, MobilCom is a healthy company at its core that one can back with a clear conscience," she said.

In MobilCom's home town of Büdelsdorf there was widespread concern about the fall-out from the split with France Télécom. "MobilCom plays such a big role that you can't even think about the town without the company," said mayor Jürgen Hein.

German economy minister Werner Müller and senior officials are due to meet MobilCom executives tomorrow to discuss possible government involvement in a rescue.

The German government has also made initial representations to the French government, which is considering its role in a potential bailout of France Télécom.

The communications group is €70bn (£44bn) in the red - a debt pile more than six times its market capitalisation.

The company was expected to announce a €15bn emergency cash call yesterday, but the board could not agree on a refinancing.

The France Télécom board is expected to meet again on October 2 to decide on a replacement for Mr Bon, and the French government has made it plain that a refinancing package will not be finalised until a new boss is appointed.

As well as a fundraising, analysts believe the company will have to sell assets. Lars Godell, a senior analyst at Forrester Research, believes France Télécom should cut its stake in Orange to just above 50% - a move which would raise an estimated €8bn.

The MobilCom situation and departure of Mr Bon overshadowed publication of better than expected figures from Orange yesterday. The firm reported first-half underlying earnings of €2.3bn, up 41%, and raised its full year earnings target by €400m to €4.7bn.

Names in the frame

There are a number of potential candidates for the France Télécom job.

Thierry Breton has emerged as the favourite. The head of consumer electronics group Thomson Multimediais is credited with turning a hopeless cause into a world player. He would have to take a sizeable pay cut to join France Télécom.

Orange's chief executive, Jean-François Pontal - a close personal friend of Michel Bon - could also be a candidate, having taken over the reins at the mobile phone company from Hans Snook and concentrated solely on getting the business to generate cash.

Nicolas Dufourcq , head of France Télécom's internet service provider business Wanadoo, has been mooted.

Speculation in the French business establishment over recent days has named Noel Forgeard , chairman of Airbus, but he is understood to have ruled himself out.

Pierre Danon , head of BT's core retail division, has been suggested but is obviously an outsider. The Frenchman, formerly European head of Xerox, has retained a high profile in his home country since taking up his post at BT two years ago. But he has yet to prove he can turn a former monopoly into a growth business.