MobilCom considers legal action against France Telecom

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The crisis at France Telecom deepened yesterday as the debt-laden telecoms group failed to come up with a strategy to repair its balance sheet while facing the prospect of a raft of lawsuits in the wake of its decision to pull the plug on the German telecoms company MobilCom.

The French group, weighed down by some €70bn (£44bn) of debt, was also left yesterday searching for a replacement for its chairman Michel Bon, who stepped down as head of the stricken company late on Thursday night. The uncertainty surrounding the state-controlled group's future sent shares in France Telecom down 2.6 per cent to close at €10.35.

The company, which had been widely expected to launch a €15bn rescue rights issue yesterday, will now hold fire on any fundraising plans until it has found a successor for Mr Bon, who meantime remains as acting head. Francis Mer, the French Finance minister, hoped it would take as little as three weeks to find a new chairman and predicted a rescue strategy would follow after that. The front-runner for the top spot remains Thierry Breton of Thomson Multimedia.

"The French government has not yet announced how it plans to reduce France Telecom's €69.7bn debt burden. We continue to believe that radical action in the form of a rights issue is desirable," said analysts at Merrill Lynch, adding: "However, the timing of any potential issue remains as unclear as ever."

But France Telecom, which is 55.5 per cent owned by the French government, was also under fire yesterday from both MobilCom and its founder Gerhard Schmid after consigning the loss-making German company, in which it owns a 28.5 per cent share, to bankruptcy in a move threatening 5,000 jobs.

MobilCom, which is expected to file for insolvency early next week, said it was mulling its legal options to claim "compensation for damages" after deeming France Telecom had "breached" contractual obligations. And Mr Schmid, who controls about 50 per cent of the equity along with his wife, said he planned to sue the French group for "billions" in damages.

Shares in MobilCom collapsed 40 per cent to €1.08, shrugging aside reassurance from the German government that it was considering offering credit guarantees to help. "As far as we know, MobilCom is a healthy company at its core that one can back with a clear conscience," a government spokeswoman said.

The uncertainty also took its toll on Orange, the mobile phone operator which is 85 per cent owned by France Telecom, as investors fretted the French group might be forced to sell some of its Orange stake as part of a refinancing.

But shares in Orange closed up 17p at 340p after the operator insisted it saw no financial impact from the looming collapse of MobilCom and reported an underlying, or Ebitda, profit of €2.3bn in the six months to 30 June.

It produced a net loss of €862m, however, after accounting for a €1.1bn write-down to cover the fall in value of its investment in the Italian telecoms company Wind. Orange also upped its Ebitda target for the year yesterday to €4.7bn from €4.3bn.