THE SKEPTIC: France Tel Needs Big Guns Vs Short-Sellers
01 Jul 10:01
By Gren Manuel
A DOW JONES NEWSWIRES COLUMN
LONDON (Dow Jones)--France Telecom SA (FTE) may have been hoping to inflict a
bloody nose on short-sellers when its share rose 21% in early trade Monday,
before dropping back.
In reality, though the injury is little more than a minor bruise.
Hedge funds in the U.S. and Europe have already made such vast profits on the
company's 79% share fall this year that they were getting nervous last week
anyhow.
In this context, even Monday's brief bounce - driven by reports now denied
that the government could consider renationalization - hardly constitutes pain,
especially compared to the injuries sustained by France Telecom itself.
However, Monday's rise has demonstrated that, wonder of wonders, France
Telecom's share price can sometimes go up. That might be enough to throw some
caution into the thinking of the short-sellers, though it's well-known they can
be difficult to shake off once they've tasted blood.
A factor making the shares such an attractive play for hedge funds is that
one of the company's major assets is the shares it holds in itself in its
Treasury, some 50 million of them, worth EUR550 million at Monday's prices.
This treasury stock is key to the company's debt-reduction plans.
In effect, France Telecom is a geared play on ... France Telecom - just the
sort of situation that hedge funds find irresistible.
In addition, if there's no equity issue most short-sellers are convinced that
FranceTel's finances will deteriorate - pushing the shares down.
And if there is an equity issue, the flood of shares would provide raw
material for covering short positions, as well as new arbitrage opportunities -
pushing the shares down.
One other escape scenario, a slow pull-through using operating profits to pay
down debt, would leave the shares exposed for months if not years.
That leaves only one option that would really burn short-sellers in the
short-term - renationalization. Hence the sharp pullback on reports the
government could consider this option.
Nevertheless, today's rise may have served as a reminder that once resolution
is found an injured share price can recover some health quickly. KPN NV (KPN)
of the Netherlands, once drowning under a sea of debt, showed earlier this year
that government backing, a new strategy, new faces at the top, and a nasty but
necessary dose of new equity can engineer a quick turnaround in perceptions.
Today's rise may have been the start of a campaign to damage short-sellers.
But France Telecom will need to wield bigger weapons to definitely send off the
sharks.
-By Gren Manuel, Dow Jones Newswires; 44-20-7842-9279;
gren.manuel@dowjones.com
(END) DOW JONES NEWS 07-01-02
10:01 AM |
