Michel Bon heads for showdown over France Telecom's €70bn debt crisis

Board meeting could demand resignations to clear way for emergency refinancing

With an estimated €70bn (£44bn) debt mountain, it was only a matter of time before France Telecom and its financial problems exploded centre stage.

It was also inevitable that both Michel Bon, France Telecom's charismatic chairman, and Jean-Louis Vinciguerra, the finance director, would end up battling for their jobs.

This Thursday's board meeting will be an event not to be missed as speculation intensifies that one or both men might quit to facilitate a multi-billion-euro refinancing.

Signing off the company's accounts for the half-year period, which are due to be released on Friday, will clearly be one of the low-lights of that meeting. The real entertainment will come when the directors discuss how to fix France Telecom's balance sheet and get debt down to a more manageable level. Its current estimated debt far exceeds its €12.2bn market value.

There will be even more fun and games when it comes to discussing what to do with the loss-making German telecoms company MobilCom, in which it has a 28.5 per cent stake. Eight months of extremely acrimonious talks have, so far, failed to produce a solution.

And then, the real highlight of the meeting of course, will be the thorny issue of who should take the rap for the problems – something that will have Mr Bon and Mr Vinciguerra squirming in their chairs.

If the story sounds familiar it is because the parallels with BT, its UK counterpart, are uncanny. Just over a year ago, BT was forced to carry out a £6bn rights issue and sell off assets to cut a near £30bn debt pile. And, of course, there has been a complete management overhaul at the UK telecoms giant.

And, more recently, Deutsche Telekom, saddled with a similar amount of debt to the French group, parted company with its chief executive Dr Ron Sommer.

"It [the situation at France Telecom] is just like BT. They've got a huge amount of debt, which they need to cut, and heads will almost certainly roll," one City source said.

If there is a positive in the current crisis, it is that the French government, which owns 55.5 per cent of France Telecom, looks almost certain to back the company. The French finance ministry said last week that if the company had "refinancing problems, appropriate measures of support will be taken."

That, however, does not alter the fact that France Telecom is facing a major funding crisis since a significant portion of its debt is up for renegotiation next year.

Analysts reckon the company needs to raise an extra €8bn to €10bn of cash to sort itself out which, given current market conditions, will not be easy.

"Whilst FT may be able to limp along with small disposals, a cut in the dividend and some further form of government support, we still believe FT will need to raise a minimum of €10bn in equity in the medium term," analysts at Lehman say.

Among the more likely options, the analysts say, is that France Telecom will be forced to mount a rescue rights issue in the same way that BT did last year. But that is, by no means, the only option on the table.

Others reckon France Telecom could negotiate a loan from the French government or a loan backed by the French government. Then there is the possibility of issuing convertible bonds as well as the unpopular option of converting some of the company's debt into equity.

But any fund-raising activity, analysts say, will have to be accompanied by a host of internal measures including cutting costs further and reducing or scrapping the dividend.

"FT's imminent and challenging refinancing schedule is likely to create a veil of uncertainty over the whole group, as even a rights issue would likely require strategic retrenchment and stringent cost and capex cuts across the group," analysts at JP Morgan say.

There is also the very real possibility, analysts say, that France Telecom will have to start selling some of its assets as part of any restructuring.

Some have argued that France Telecom could alleviate its woes by selling off some of its 85 per cent stake in the mobile phone operator Orange. Analysts at Goldman Sachs point out that if France Telecom sold its stake in Orange down to about the 51 per cent level, then it could raise about €7.5bn, alleviating but not solving its funding issues.

The main problem with that plan is that there seems no obvious buyer for the shares. In addition, such a shift in strategy would almost certainly only come from fresh blood.

"Rationally, they [France Telecom] have to look at eating into their crown jewels and Orange is certainly one way to do that. But that, in my opinion, would be contingent on management change," one analyst said.

As for MobilCom, France Telecom must decide whether to buy the remaining shares in the company or to walk away and let it go bankrupt. Neither option would be cheap and a bid for the business would almost certainly saddle France Telecom with several more billions of euros of debt.

For now, France Telecom remains locked in a bitter battle with MobilCom's founder, Gerhard Schmid, who controls about 50 per cent of the equity. Mr Schmid, who was ousted as chief executive of MobilCom three months ago, is pushing for France Telecom to make a bid for the company.

While analysts reckon France Telecom is unlikely to let MobilCom collapse, it is far from clear whether an agreement between all the involved parties can be reached let alone whether it is any nearer

"While we believe a solution to the group's MobilCom exposure is edging closer, there are no guarantees that there will be any firm announcement [later in the week]," analysts at Credit Suisse First Boston said.

Given the nature of France Telecom's problems and the sheer size of the refinancing needed to put the company back on course, it is hard to see both Mr Bon and Mr Vinciguerra surviving much longer.

Out of the two, industry watchers believe Mr Bon is more likely to shoulder the blame and quit. And the speculation has already started over who might replace him. Names in the frame include Nöel Forgeard of Airbus and Thierry Breton of Thomson Multimedia.

"I could see a case where the blame falls solely on Michel or on both him and Jean-Louis. Someone will have to take the rap. It's just a question of who and when that happens," said one City source.

And France Telecom's financial results on Friday will do little to help either Mr Bon's or Mr Vinciguerra's cause as speculation mounts the company will announce multi-billion-euro write-downs, mainly to cover the fall in value of its stake in the cable company NTL.

The six-month results, however, will pale into insignificance given the financial crisis engulfing the company and stealing headlines across Europe. And, with the investment community's patience running out, France Telecom would be well-advised to set out its stall sooner rather than later. Inaction is not an option.