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To: Eric L who wrote (2166)	4/2/2002 9:49:43 AM
From: elmatador	Read Replies (1) \| Respond to of 9255

France Telecom Published: April 1 2002 20:27 \| Last Updated: April 1 2002 20:39 One minute growth stock, the next cash cow. The reinvention of Orange stretches credibility. Of course, the business has a natural maturity cycle. Yet even allowing for this, there has been an abrupt change of gear. One suspects this was driven by France Telecom's hunger for cash, rather than Orange's own needs. Michel Bon has managed conflicts of interest between Orange and France Telecom with exemplary fairness. But to keep on doing so, when the parent company's balance sheet is under such pressure, will require the wisdom of Solomon. Consider the exit from Wind. Orange lacks control, and its partner, Enel, is pursuing a multi-utility strategy under another brand - so selling out is not foolish. But France Telecom had in the past been willing to stay invested, maintaining a bridgehead in Italy, in the hope that Enel would eventually change its mind. Orange does not need to sell now: it only has E6.5bn net debt. France Telecom needs Orange to sell now, because it has E60.7bn debt. Or MobilCom. With the endgame still under way, France Telecom is considering how any ultimate liability for MobilCom's existing debt and future funding requirements should be shared between it and Orange. Orange owns the equity stake, so burden sharing is not outlandish. But the legal obligation to act as a lender of last resort to MobilCom lies with France Telecom. It will not be easy to find a compromise. These are specific transactions. But the real issue is one of general strategy. Short term, there may not be a conflict of interest over cash. Investors want free cash flow; Orange may even benefit from rigorous focus on cash generation. A mobile business today is made up of a mature second-generation business, overlaid with the beginnings of a third-generation business. Because 3G is happening later, and more slowly than expected, there will be a natural interval in which Orange generates surplus cash. But over time the conflict will become more apparent. For illustrative purposes, make a few simplistic assumptions: assume Orange sells its stake in Wind for E5bn as France Telecom suggests (very optimistically) it will, does not acquire MobilCom, nor does any other deals or start paying a dividend. By 2005 Orange would be sitting on net cash and generating annual operating cash flow, before taxes and financing costs, of E3.5bn to E4bn. Even under other scenarios, Orange will be a cash-generating monster. What will it do then? By 2005, 3G services should be under way in earnest. There may be a compelling case to reinvest Orange's surplus cash, either in 3G projects or in expanding its presence outside its core France/UK base - for instance, back into Italy and Germany. But France Telecom shareholders will want Orange to keep reinvestment to a minimum and pass surplus cash to the parent, either through dividends or shareholder loans. The problem is structural: the debt is in the wrong place. The loans that were sunk into building the mobile operations are held by France Telecom, but the assets now lie with Orange. It sounds rather like the old story of Telecom Italia and TIM. Previous TI management compounded structural flaws with disregard for minority interests. Mr Bon may not - but the problem will not go away.