France Telecom drops Mobilcom

After months of argument over whether France Telecom - itself bowed under billions of euros in debt - should have to assume some of Mobilcom's liabilities as well, the French company has pulled the plug.

In a statement, France Telecom and Orange said that Mobilcom and its chief executive and founder, Gerhard Schmid, had breached a "co-operation framework agreement" governing the relationship between the firms.

Shares in Mobilcom fell 14.5% during Wednesday morning trade, extending a 35% slide onTuesday.

Debt worries

Mobilcom claims France Telecom's decision to withdraw has no legal basis and is considering how to retaliate.

"We're looking into whether and how we can defend ourselves against this," Mobilcom chairman Gerhard Schmid told the Financial Times Deutschland.

"I'm not going to declare war at this point."

France Telecom owns 28.5% of Mobilcom, and the termination of the agreement leaves the question of the debt up in the air.

Mobilcom has to refinance a 4.7bn euro loan, which matures in July.

"We continue to talk with banks and suppliers to determine whether we can find an acceptable solution for the company," France Telecom chief financial officer Jean-Louis Vinciguerra told a conference call.

"We are ready to give limited financial support to the company to prevent it from going bankrupt."

Hard words

But the French companies have pulled no punches in stating their reasons for backing out.

Both the Mobilcom board and Mr Schmid had breached the CFA by refusing to give the French firms a final sign-off on Mobilcom's business plan, the statement from France Telecom and Orange said.

Mobilcom's expansive plans to build out a third-generation network had been a sticking point for some time, with France Telecom keen to substitute a cheaper, more long-term strategy.

Furthermore, Mr Schmid had breached German corporation law by putting 68m euros of Mobilcom money into Millennium GmbH, a company owned by his wife, France Telecom and Orange said.

The money has not been repaid - indeed, the Financial Times alleged Mr Schmid's wife had used it to buy Mobilcom shares - and that provided another breach of the CFA, the French companies said.

Add in the Mobilcom board's failure to sack Mr Schmid, and there are "clear legal grounds" for their action, France Telecom and Orange said.

Mr Schmid has consistently said he would only step down if France Telecom bought out his 49.9% stake.

"In consideration of the loss of confidence that has occurred between France Telecom/Orange and Mr Schmid and Mobilcom, France Telecom/Orange have no option but to terminate the CFA," Tuesday's statement said.