France Télécom funding probed

The European Commission launched an in-depth investigation into a €9bn credit line offered by the French government to its...

The European Commission launched an in-depth investigation into a €9bn credit line offered by the French government to its indebted phone operator, France Télécom.

"In view of the fact that the state support is provided through a complex financial transaction, the commission will examine in detail the way in which the shareholder's advance is granted," the commission said.

The probe will also examine the business tax break granted to France Télécom. An exemption from taxes other firms in France must pay "appears to have conferred an advantage on France Télécom in as much as it paid a lower business tax than it would normally have had to pay under the rules of ordinary law", the commission said.

Last month, the French government officially notified the European Commission that France Télécom was facing financial difficulties.

To remedy the situation, French authorities notified the commission that they planned to increase France Télécom's capital through a rights issue to which France and private shareholders would subscribe in proportion to their exisiting stakes in the company.

As the French authorities considered that it would not be possible to recapitalise France Télécom in the near future, they announced that a shareholder's advance in the form of a credit line not exceeding €9bn would be granted ahead of their participation in the rights issue.

The French authorities claimed that the advance would carry an interest rate at market rates. If true, the credit line would pose no problems for EU competition officials. However, the commission said it "cannot rule out the possibility that the financial measures put in place by the State for France Télécom contain elements of state aid".

"It seems that the French authorities themselves admit that France Télécom was in such a financial state that, until the shareholder's advance was announced, it had been unable to raise capital on the market on appropriate terms," the commission said.

"At the same time, as the French authorities leave no doubt that the credit line anticipates the State's contribution to boosting France Télécom's own resources, a formal investigation has to be undertaken as to whether the credit line enabled France Télécom to bring forward its return to the bond market."

After the announcement and granting of the credit line, France Télécom has been able to return to the bond market for the first time after 18 months and raise large amounts of capital.

"The commission needs further proof from the French authorities that the return on the invested capital would have been acceptable to a private investor," the commission said.

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