France Tel. ends MobilCom pact

PARIS/LONDON, June 11 (Reuters) -- France Telecom on Tuesday ended a cooperation pact with its estranged German partner MobilCom and all but pulled the plug on financing it any further, piling on the pressure for a rapid solution over the future ownership of the German affiliate.

France Telecom (PFTE) and its mobile unit Orange (PORA) terminated an official agreement tying them to their 28.5 percent-owned affiliate and said only a rapid solution with banks to end their long and bitter row would save MobilCom.

Whereas it previously was tied to providing full backing for its cash-strapped affiliate MobilCom , France Telecom said it would now cough up only limited financial support to the tune of a few million euros.

The so-called Cooperation Framework Agreement (CFA) had been widely expected to collapse after France Telecom and MobilCom's vociferous CEO, Gerhard Schmid, began trading insults earlier this year over France Telecom's monetary obligations -- but France Telecom said it still hoped to hammer out a deal.

France Telecom Finance Director Jean-Louis Vinciguerra said in a conference call that Schmid had breached the CFA by overlooking the French camp's right to have a say in company decisions and by violating German share laws with a hushed-up deal between MobilCom and a company owned by Schmid's wife.

"We have been very patient, but at this point, our patience has run out," Vinciguerra said, explaining that France Telecom had repeatedly recommended Schmid resign, but he had refused, and MobilCom's supervisory board rejected motions to sack him.

Vinciguerra said that with France Telecom's cash obligations now lifted, a deal over MobilCom's ownership needed to come before a 4.7 billion euro ($4.43 billion) debt weighing on MobilCom's balance sheet comes up for renewal on July 31.

"This situation necessitates a very rapid accord with the banks. We cannot wait until July 31. A solution must be found fast or not at all. If there is no accord by July 31 and they can't refinance the debt, they will be insolvent," he said.

"We have not stopped financing MobilCom -- we gave them an advance yesterday. We are ready to envisage limited financial support but we now feel that having ended the CFA there is no obligation. If an acceptable solution is not found rapidly, it's clear (MobilCom) could come very close to bankruptcy," he said.

MobilCom said in a statement there was no basis for France Telecom to terminate the agreement.

"On behalf of MobilCom there were no contract offences which would justify the termination of the CFA," the company said.

MobilCom shares plunged 46 percent in Frankfurt to a life low of 7.25 euros before being suspended until the end of play.

France Telecom surged 8.27 percent to close at 18.85 euros on hopes it was strengthening its negotiating position and might get to buy out MobilCom at a lower price.

Banks seen working on fast deal

Vinciguerra said France Telecom and Orange would pursue discussions with various parties about MobilCom's future, but said Schmid would no longer be around the table.

A deal hinges on whether a 17-bank syndicate can refinance MobilCom's debt, possibly via a debt-for-equity swap, to allow France Telecom to buy it out without risking a credit downgrade.

But with only six weeks to go before the July 31 refinancing deadline, talks must be reaching make-or-break point.

Sources close to the talks said on Tuesday that the bank consortium, backed by France Telecom, plans to seal a funding deal ahead of MobilCom's supervisory board meeting next Friday, which would mean approving the debt refinancing within 10 days.

Months of painstaking negotiations have battered shares in both companies. MobilCom risks going under if its French partner stops bankrolling its plans, and indebted France Telecom risks seeing its bonds cut to junk status in the event of a takeover.

Sources close to the deal, which is based on swapping MobilCom's 4.7 billion euros of debt for France Telecom equity, said an end to the rift hinges on winning preliminary backing for the plan from the entire bank syndicate.

"The objective is to get the first approval by next week at the latest," a source close to the deal said, adding that MobilCom's four main creditors had already agreed terms.

Schmid, who founded Germany's No. 6 mobile phone firm and is its largest shareholder, in March said he was ready to sell his 40 percent stake for 22 euros per share to France Telecom.

Under German takeover code, this buy would trigger a mandatory bid to holders of the remaining 31.5 percent of MobilCom's shares under the same terms as offered to Schmid.

But the heat went up when France Telecom tried to oust Schmid as CEO after he was found using company funds to pay his wife for share options and was ordered to pay back 68 million euros to MobilCom -- something Vinciguerra said he had not done.

If the banks fall into line next week, France Telecom could be in a position to make a formal offer to MobilCom shareholders within two weeks. A new offer is likely to be pitched around 16 or 17 euros per share, sources say, still a hefty premium to MobilCom's current, battered share price.

France Telecom is intent on avoiding adding MobilCom's debts to its 61 billion euro debt mountain. Under the proposed deal, the 4.7 billion euros the banks have lent MobilCom would be converted into a bond, which would be swapped for France Telecom shares at an undisclosed price in 2003.

Industry sources noted all parties would be losers if no deal is reached, and some labelled France Telecom's latest move as sabre-rattling, noting it is loath to lose its foothold in Europe's biggest telecoms market and after months of tortuous negotiations remains keen to oust Schmid and strike a deal.