Tensions revealed last week between France Telecom and Mobilcom, a German company in which it owns a 28.5% stake, will continue to push FT's spreads wider as the two companies continue to duke out their problems through the media, say London-based telecom analysts. "It smells, and in the coming weeks, it's going to get worse," says Simon Surtees, telecom analyst at Bear Stearns. Surtees reckons spreads on FT bonds could widen to as much as 400 to 500 basis points over swaps before the Mobilcom problem is resolved. At some point FT bonds will be a screaming buy, he adds, but it is anyone's guess as to when that will be. As of last Wednesday, FT's 53/4% of '04 was trading at 234 over swaps, compared to Poland's TPSA, of which FT is a part owner, which has a 6 1/8% of '04 which was trading at 217 over.
The heart of the conflict between FT and Mobilcom is the latter's capital expenditure plans to the tune of ¤10 billion for third generation capabilities--plans with which FT is not in agreement. To force FT's hand, Mobilcom's founder Gerhard Schmid has indicated he will trigger a put option on FT forcing the company to buy his 33% stake in Mobilcom. This event would put additional pressure on FT's balance sheet, which it is desperately trying to de-leverage. Relations between the two companies hit a new low last week when FT's representative on the Mobilcom board stepped down, citing poor corporate governance.
Vladimir Andrioutchenko, an analyst at Commerzbank Securities, says spreads have widened because traders have put wide bid/offer spreads on FT's bonds, not because there has been a huge sell-off yet. "Investors are getting more and more concerned," he says. And, once the "real money" (or non-speculative or non-levered) investors begin to sell, spreads on FT bonds will come under additional pressure. Andrioutchenko adds that FT is depending on selling its shares in the secondary market to reduce debt, but the Mobilcom fiasco has also driven down its share price making it difficult to deleverage and a ratings downgrade more likely.