After a Mobilcom board meeting in Hamburg, France Telecom announced that Mr Schmid had stepped down, effectively ceding control to the French firm, which owns less than one-third of Mobilcom shares.
The agreement paves the way for a 4.7bn-euro ($4.56bn) rescue package for the operator, which had been on ice while Mr Schmid's future remained undecided.
Mr Schmid was one of Germany's most controversial business leaders, and made little secret of his dislike of France Telecom's interference in his firm.
The way is now clear for France Telecom to make a takeover bid for the roughly 40% of Mobilcom still owned by Mr Schmid.
Shares in Mobilcom rose by 13% on the news.
Fading fortunes
Mobilcom offers its 4.9 million subscribers mobile phone services by piggy-backing on rival networks.
It has fared poorly in recent months, and saw revenues slump 29% in the first quarter of this year.
The row between France Telecom and Mr Schmid accelerated after he was accused of improper share dealings via a company owned by his wife.
Mrs Schmid also owns 10% of Mobilcom, and it is not yet clear how easy it will be for France Telecom to buy up their combined 50% stake.
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