France Telecom peels off Orange

Vodafone AirTouch has created a new competitor and at the same time bolstered its chances for hegemony in Europe with the sale of Orange to France Telecom last week.

The $40 billion deal, which includes more than $21 billion in cash, gives Vodafone AirTouch the resources to purchase universal mobile telecommunications system (UMTS) licenses across Europe. Simultaneously, France Telecom emerges as the second-biggest European wireless operator, with an expected 30 million customers by the end of the year to Vodafone AirTouch's 35 million worldwide at the end of 1999.

What France Telecom lacks compared with Vodafone AirTouch is a U.S. presence, but that could change soon. "If we're going to be a global brand and if we're going to challenge Vodafone [AirTouch] globally, we must be in North America and possibly South America as well," said Hans Snook, CEO of Orange. The company could enter the U.S. market by setting up a virtual operator, strategic alliance or franchise agreement, he said. Orange also has considered participating in the 700 MHz auction planned for later this year.

But first Orange will focus on Europe. "If you want to exist in the U.S. market, you have to be very strong in your own market," said Michel Bon, chairman and CEO of France Telecom. "For us our own market is Europe." Combined, the new company will have equity stakes in operators in 16 European and 11 other countries. "Our primary focus, although it will be in the short term, will be to integrate and consolidate the businesses between the Orange of today and the new Orange of tomorrow," Snook said.

In keeping with Orange's strong independent image, France Telecom plans to combine its European wireless holdings under Orange and execute an IPO for the company.

Later this year or in early 2001, France Telecom will take public 10% to 15% of the wireless company, which Snook will head. Some analysts have said that Snook threatened to leave the new company if it wasn't made independent with him at the helm.

Orange's visions couldn't be realized otherwise, Snook said. "Orange could only be delivered by an independent company led by Orange management. All of this is at the center of the thinking and agreement with France Telecom," Snook said.

Cash is most likely what took center stage for Vodafone AirTouch, however, which had the ultimate say in what company would buy Orange. "Orange wasn't excessively keen on France Telecom and was even making noises about wanting to be independent," said Jake Saunders, regional director for The Strategis Group Europe. WorldCom, KPN and a number of other operators - many that failed to win licenses in the U.K. UMTS auction - also were interested in Orange as a last-ditch attempt to gain entry to the U.K market. Each of those operators was likely offering about the same amount of money for Orange, Saunders said, but France Telecom was able to contribute a large portion of the price in cash.

"It was the cash that clinched it," said Simone Lewis, senior analyst with The Yankee Group Europe. "It gives [Vodafone AirTouch] money to bid for numerous 3G licenses across Europe."

Likewise, a potential Orange IPO can contribute to France Telecom's funds for buying 3G licenses or other European companies. "We think we have a strong potential for rapid expansion throughout Europe and globally," Bon said. France Telecom is involved in the UMTS bidding process in Germany, and Orange has been pursuing licenses in Italy. France will hold a beauty contest instead of an auction, giving the incumbent France Telecom a likely chance of receiving a license there.

One threat to the new company - as with many mergers or acquisitions - will be the delicate chore of blending different company cultures. The two operators come together with very different historical perspectives. France Telecom has a market share of wireless business in France just shy of 50%. By contrast, Orange always has been viewed as an upstart competitive operator. "Orange has been the underdog that has forged its way to success," Saunders said. The feisty operator has prided itself on being extremely brand conscious and innovative, and it has every intention of continuing that tradition.

"There will be no change in our culture or values," Snook said. He has plans to make the Orange brand available in upwards of 50 countries and to 1 billion people on six continents by 2005. "The brand of the future is Orange," Snook said. The company will decide on a market-by-market basis if it will change an existing brand to the Orange brand.

The deal also lets France Telecom reclaim its position as a leading operator in Europe after a string of recent setbacks. The operator failed in its attempt to win UMTS licenses in the U.K. and Spain, lost an attempted acquisition of E-plus in Germany and recently disintegrated its relationship with Sprint and Deutsche Telekom.

"Definitely, Orange was a move that France Telecom had to do to get back in the game," said Eric Kintz, head of U.S. e-commerce and telecom practices for Roland Berger & Partners.