France Telecom Needs to Grow to Counter Apple, Google Threat

Acquiring TeliaSonera could give France Telecom the scale it needs to counter future competitive threats from companies such as Google or Apple, said France Telecom Finance Director Gervais Pellissier on Friday.

He confirmed that France Telecom is interested in acquiring the Nordic telecommunications operator, but denied that negotiations have started.

France Telecom will consider mergers and acquisitions that allow it to expand in emerging markets, to strengthen its activities in Western Europe, or to gain competencies in certain areas, he said in a conference call with analysts and journalists.

Mergers typically allow companies to cut costs by eliminating overlaps within a given country. But there are other synergies that can be exploited across borders, he said. For example, the opportunity to cut costs by realizing economies of scale in research, network construction, software development or the sourcing of mobile phones could also make a merger attractive, he said.

TeliaSonera and France Telecom are complementary in many ways, Pellissier said, notably in the extent of their deployment of broadband technologies such as DSL (Digital Subscriber Line) on fixed networks, and 3G (third-generation) service on mobile networks.

Those advanced networks make France Telecom and TeliaSonera subscribers attractive to companies such as Google and Apple, which are increasingly showing an interest in the profits that can be made from mobile phone users. But they, and companies such as Yahoo or Microsoft, are also a network operator's partners, he said.

Getting bigger through mergers is one way that a telecommunications operator can strengthen its hand in negotiations with such partner-competitors, Pellissier said.

"It's not a matter of competing with Yahoo, Google, Microsoft or Apple on their own patch," he said.

Scale is also necessary to encourage equipment developers to work with France Telecom on the deployment of new technologies, such as a future generation of terminals that link fixed-line and mobile networks, he said.

France Telecom has already taken a step in this direction with its LiveBox, which combines a DSL modem, TV receiver and Wi-Fi base station, and links to the company's mobile phone network using a technology called UMA (Unlicensed Mobile Access).

"How do you expect us to develop the LiveBox if we don't have several million customers using it? How can we push UMA if we don't have that power?" Pellissier asked.

Nevertheless, he cautioned, the company is not interested in growth at any cost, and a deal must not affect the company's financial stability. Among other things, it would have to respect the company's commitment to keep its medium-term debt in line with gross operating margins.

"No deal of such a size could happen unless it pleased our shareholders," he said.