Vivendi holds the key to Vodafone's French ambitions

Crossed Lines

While the mobile phone operator Vodafone has long been keen on upping its stake in the French mobile phone firm SFR, analysts were predicting yesterday such a move still looked unlikely in the short term.

Speculation has been mounting that Vivendi, which controls SFR, could come under pressure to relinquish control of the telecoms company as part of a wider effort to get its own house in order.

Vivendi's chairman and chief executive Jean-Marie Messier has faced growing criticism in both the US and in Europe over the company's strategic direction and could, some argue, now be prepared to stage a U-turn and sell the holding in SFR.

While industry sources said Vodafone would be interested in seizing control of SFR, they said such a move was not in the UK operator's hands and would only come about if Vivendi forced the issue.

"Vodafone would love to take control but I don't think the cards are being played by Vodafone in this. He [Mr Messier] is not going to let go of his biggest growth engine at this stage as SFR is a big cash flow spinner," said Izak Swanepoel, an analyst at Banc of America.

SFR is 20 per cent owned by Vodafone with the balance of the equity held by Cegetel, the French telecoms firm in which Vivendi is the controlling shareholder with a 44 per cent stake. Vodafone's 15 per cent share of Cegetel takes its economic interest in SFR up to 32 per cent. But analysts argued that even if Vivendi were to back down and Vodafone did look to make an offer, Cegetel's other shareholders could still block a deal.

Cegetel's other shareholders are SBC with a 15 per cent holding and BT with a 26 per cent share, although the British telecoms giant has made no secret of the fact it wants to exit the business.

But, in a further twist, the ownership structure of Cegetel is likely to change over the course of the coming months since its shareholders will be free to sell their holdings from late September.

While, in theory, it is thought the Cegetel shareholders could sell their holdings to a third party before the end of September, that would require the agreement of the others.

BT has made it clear it wants to sell its 26 per cent share of Cegetel but it is not thought to be in a hurry.

Last year, it was reported that Vodafone was looking at ways of boosting its ownership of SFR either by buying up the BT holding or by doing a deal with Vivendi.

One investment bank estimated SFR was worth just in excess of £11bn and suggested Vodafone could end up paying £11bn for the 80 per cent stake it doesn't own once a takeover premium had been factored in.

ABN Amro estimated SFR was worth £17bn and predicted Vodafone would have to pay in the region of £6bn purely for Vivendi's share of the business.

But with Vodafone shares under intense pressure of late, City analysts thought the company would have to turn to the debt markets to finance all or part of such a deal. That, in turn, could put more pressure on Vodafone shares since Vodafone already has an estimated £15bn to £16bn of debt.

But until Vivendi decides to exit the telecoms business, Vodafone, which is undoubtedly mulling its options in France, looks to be left with the weaker hand.