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Friday, 5 July, 2002, 13:47 GMT 14:47 UK
Why bad news lifted France Telecom's shares


Shares in deeply indebted France Telecom have spent the best part of a week defying gravity.

The stock has soared by one-third in five days, even though analysts and credit agencies have been doing their utmost to rubbish the company's outlook.

Not only have they raised further concerns about the group's ability to service its debts, they have also labelled its shares as little more than "junk investment".

Yet Friday's downgrade by the ratings agency Fitch - which came soon after similar moves by its rivals Moody's and Standard & Poor's - failed to spook investors, who instead appeared to be encouraged by the gloom.

Bailout bets

By Friday, it seemed that every bit of bad news released during the week had sparked yet another jump in France Telecom's share price.

For the casual observer, such celebration of gloom may seem totally out of character.

But there is a simple explanation for France Telecom's rise, from about 10 euros on Monday to almost 15 euros on Friday.

Investors have simply been placing speculative bets on France Telecom's failure in the hope that its majority owner, the French government, will step in to help.

According to this way of thinking, bad news was, in fact, good news.

"The group is in a liquidity crisis and can no longer get any money from the bond market," reasoned one credit analyst.

"It can't get itself out of its predicament without government help.

"So when push comes to shove I'm pretty confident the state will step in."

Value lost

At the heart of France Telecom's crisis lies its massive debt burden of about 61bn euros.

In recent weeks, analysts have stoked investors' fears by suggesting that the debts might well rise further if its part-owned subsidiary MobilCom fails to retain its feeble grip on the German market.

A loud brawl with MobilCom, and disappointing performance by France Telecom's mobile phone subsidiary Orange, have further weighed on investors' sentiment, as has the price it paid for third generation mobile phone licences.

Consequently, France Telecom's shares lost 70% of their value during the first six months of this year.

Everybody wins?

According to France Telecom chairman Michel Bon, speculators taking bets on lower share prices have caused much of this year's fall.

And it seems this week was the time when they decided to change their strategy.

"The rise in the share is speculative," said one trader.

"The stock had fallen to a ridiculous level and enough people believe in this talk about state support to lift it.

"The banks are spreading the talk around as well to try and make a bit of money."

Even the government, which owns 55% of France Telecom, has benefited as the rumour-mill has propelled the stock higher.

Renationalisation

The rally in France Telecom shares begun on Monday when a spokesman suggested that the company might renationalise the group sparked a frantic buying spree.

Repeated denials from the government did little to change traders' sentiment.

"A renationalisation was never really possible but the market still believed it," said one trader.

"Even if we know the EU will block most options for state help, everyone is still convinced [the government] is preparing something."

That something could be revealed soon if the rumour mill is to be believed.

It could come as a direct government loan, it could be a fresh government guarantee, or it could be a new government-backed bond issue which would help France Telecom refinance its debts, traders speculated.

And unless their optimism is tempered during the weekend, such hopes could well push the shares even higher when trading resumes on Monday.

See also:

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