France Telecom bailout sparks EU investigation

The European Commission launched on Jan. 30 a probe into a multibillion-euro bailout by the French government for ailing France Telecom to decide whether the deal breached EU state-aid rules.

The probe will also investigate whether a special tax regime applied to the state-controlled telecommunication operator constituted a subsidy to help the debt-ridden giant.

"The commission's doubts concerning the possible presence of aid in the two measures - their shareholders' advance and the business tax - were not dispelled after it had examined the information presented by France," a commission official said.

"Nor can it conclude from the information in its possession whether the aid, if any, is compatible with the proper functioning of the internal market."

In Paris the French government stated that the 9 billion euro credit line made available to France Telecom "comprised no element of state aid."

France's Finance Ministry added that it would cooperate fully with the commission's enquiry.

For its part France Telecom only said that the probe's launch "did not prejudge the final decision."

The French state, which owns 56.4 percent of France Telecom, recently unveiled a rescue package for the debt-straddled company under which the government would provide the group with a credit line of 9 billion euros.

The funds would be made available indirectly via ERAP, a state-owned shell company to which the state would transfer its entire stake in France Telecom.

Paris has denied the arrangement amounts to state aid and has not formally notified the operation to the Brussels-based watchdog commission, which is tasked with approving such funding in the 15-member bloc.

French Finance Minister Francis Mer has defended the rescue plan, which France Telecom hopes will help cut its crippling 70 billion euro debt to 40 billion by 2005.

Earlier this month France Telecom said it had issued 5.5 billion euros in bonds and had ample cash to meet debt payments this year.

The funds will be repaid by France Telecom at market rates, according to the Finance Ministry. Mer has justified the aid as an "investment" that can be expected to recover value in the market.

But Brussels said it would have to investigate the "complex" way in which the bailout was organized.

"In view of the fact that the state support is provided through a complex financial transaction, the commission will examine in detail the way in which the shareholder's advance is granted," it said.

France Telecom chalked up a massive pile of debt during the heady years of the telecom bubble but is now paying the painful price for its ambition to become a leading telecommunication company through acquisitions.

"A formal investigation procedure does not prejudge the final decision. One of its aims is to give the member state concerned and France Telecom's competitors the opportunity to make their views known," the commission said.

A commission source said the probe could last up to 18 months. In theory, France Telecom could be forced to repay the 9 billion euros if the bailout is found to be illegal under EU rules.