State Sells France Telecom Shares

The French government is giving up control of France Télécom by raising up to €5.75bn (£3.9bn) as part of a debt reduction campaign to met eurozone rules on government borrowing.

The finance ministry announced yesterday that it was placing up to 12.1% of France Télécom shares. The sale would cut its stake in the company to just over 40%.

The move sparked speculation that other cash-strapped governments could sell shares in former state-owned monopolies. Germany, for example, which like France is in breach of the eurozone rules that limit government debt to 3% of GDP, has 43% of Deutsche Telekom.

Commenting on the timing, one corporate financier said: "There is merit in going early in the [post-holiday] season because markets may become more volatile in the run-up to the US elections and there are other governments willing to sell telecoms stock."

Deutsche Telekom shares followed those of France Télécom lower yesterday. Some traders suggested that the German company's share price may have fallen as investors sold stock to switch into France Télécom.

The planned placing of between 236m and 299m shares, priced between €18.95 and €19.25, is the biggest equity offering in Europe this year. By taking the government's holding below 50%, it marks a watershed in the relationship between the state and the former telecoms monopoly.

France Télécom was privatised in 1997. It embarked on an acquisition spree, which by March 2000 had seen the shares reach €219 - but the company's debt rocketed.

When the tech stock bubble burst, the share price crashed and the company was almost crippled by the debt burden, which forced it into a painful restructuring programme.

In 2003, the government backed a €15bn rights issue that lifted its stake to well above 50%, which, until earlier this year, had been the legal minimum it could hold.

The finance minister, Nicolas Sarkozy, is hoping to make a capital gain on the rescue rights issue, which was priced at €14 a share compared with the asking price of around €19 for the placing.

"This [sale] will allow the state to reduce its debt and give the company the flexibility it needs," he said after a cabinet meeting yesterday.

Though France Télécom is not raising money through the placement, it is issuing up to €1.15bn worth of bonds - convertible into shares in five years - in parallel with the government placement.

Analysts said the move was aimed at reducing the costs of financing a debt burden that has come down from around €75bn to about €47bn, rather than raising cash to spend.

The reduction in the France Télécom stake also marks a key point in Mr Sarkozy's plans to privatise a big chunk of remaining state-owned assets. Despite union protests, the government is pressing ahead with plans to sell shares in energy utilities Electricité de France and Gaz de France.

As part of the planned placement, both France Télécom and the government have agreed not to sell more shares for nine months.