MobilCom sees insolvency averted after rescue deal

Struggling German telecoms group MobilCom AG said yesterday a government-backed rescue deal had averted the immediate danger of an insolvency threatening thousands of jobs just a week before the federal election.

However, Chief Executive Thorsten Grenz said a restructuring plan could still lead to several hundred job losses from the group's 5,500-strong workforce.

The German government threw MobilCom a lifeline on Sunday, announcing e400 million in soft loans from state banks to keep the group going after France Telecom cut off vital funding last week.

The move triggered a demand for notification of the plan from the European Commission under rules restricting state aid to industry, although the government insisted it did not have to inform Brussels as the rescue was funded by bank credits.

MobilCom shares, which collapsed after France Telecom, controlled 55 per cent by the French government, said it was pulling out last week, rocketed to three times their value yesterday, trading 194 per cent higher at €3.29 by 1050 GMT.

With a slim lead in the polls to defend, Chancellor Gerhard Schroeder could ill afford a large corporate failure that might focus campaign attention away from his vote-catching opposition to war in Iraq and back on the country's four million jobless.

"The government will support MobilCom in talks with the French government," Schroeder told a news conference. "We've had talks with the Elysee this morning."

Economics Minister Werner Mueller said France Telecom, which took a 28.5 per cent stake in MobilCom in 2000 as a way into Europe's biggest telecoms market, had made assurances it would back up MobilCom's costs for a new generation mobile licence and costs of building new networks which he put at €18 billion.

The French giant has agreed to stand by a deal with banks to swap billions of euros in MobilCom debt for new debt repayable with France Telecom shares but the end of its funding commitment meant the German affiliate would have been unable even to continue normal operations.

The weekend deal, echoing Schroeder's dramatic but ultimately unsuccessful 1999 bailout of construction giant Philipp Holzmann, should keep the company going for at least six months, said Bernd Rohwer, economics minister in MobilCom's home state of Schleswig Holstein.

Conservative challenger Edmund Stoiber attacked the government for causing the crisis by extracting too high a price in its auction of new generation 3G or UMTS licences in 2000.

"The reason lies with the government in that it made the six largest phone companies pay practically €50 billion from their pockets," Stoiber said on television. "It was a big mistake of the government."

Whether the package will be enough to secure a long-term future for MobilCom remains open.

MobilCom founder Gerhard Schmid said the firm was now well placed to start talks with France Telecom and could continue to invest in new generation mobile technology, although analysts questioned its future in a crowded and still uncertain market.

"In my view, MobilCom is not healthy," SES Research analyst Klaus Baumann said. "If it were, France Telecom wouldn't have turned away from it. MobilCom would have a chance if it moves back to its reseller business and gives up UMTS," he said.

Dwarfed by rivals Deutsche Telekom and Vodafone, MobilCom serves its roughly five million customers by buying network capacity from other operators such as KPN's German unit E-Plus.

"Does MobilCom have a future in Germany? No. In my view this is purely election driven," said one London-based analyst who declined to be named.

"MobilCom could continue as a pure reseller business but that would be a far cry from what it's intending to do now and the valuations would certainly reflect that."

Under the weekend deal, some €320 million will be provided by the state-owned Kreditanstalt fuer Wiederaufbau bank and the rest by Schleswig-Holsteinische Landesbank.

MobilCom said on Sunday it believed it had a strong legal position on France Telecom's duties to finance it, but it would initially seek reconciliation in talks with its French partner.

As part of the deal, Schmid, who was forced out as chief executive in June after a bitter row over strategy and funding but who still has some 50 per cent of MobilCom shares, agreed to place his stake in a trust that would control its voting rights.

Schmid said he was confident the French group would not now force MobilCom to repay its overall debts.

"France Telecom clearly broke the agreement. The experts from the Justice Ministry have examined that. Our contracts are valid," he said. "We are in a strong position because there is no liquidity problem and we can negotiate a deal where France Telecom forgives the debt," he said.