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. Last Updated: 07/27/2016

Orange Buy Augurs Market Change

LONDON -- Hans Snook, chief executive of Orange PLC, Britain's third-largest wireless telephone operator, stood before an audience of financial analysts here six months ago extolling the benefits of combining with the German conglomerate Mannesmann, which had bought Orange for $33 billion.

On Tuesday, Snook made a similar presentation, only this time, the interactive slide display he showed had a different company's logo in the corner as Orange's new parent: France Telecom, the former state-owned telephone monopoly.

The sale of Orange to France Telecom for about $37.5 billion in cash and stock by Vodafone AirTouch PLC, Mannesmann's new parent, represents more than just another telecommunications deal. It demonstrates the rapid pace of change in Europe's wireless telephone market.

The sale of Orange to Mannesmann in late October was the catalyst for a string of mergers and acquisitions in European telecommunications. Since that deal, Vodafone, the world's leading wireless company, has bought Mannesmann for a record $183 billion, which forced the sale of Orange to satisfy regulators worried about Vodafone's dominance. NTT's Docomo of Japan took a 15 percent stake in the Netherlands-based Royal KPN's mobile unit, KPN Mobile, in May, in part to make a combined bid for Orange, executives from those companies said at the time. And Telefonica of Spain and Royal KPN tried unsuccessfully to marry their businesses recently to compete in a marketplace that has fashioned behemoths like Vodafone, and now, France Telecom.

The deal catapults France Telecom into a new league, putting it within competitive reach of Vodafone and possibly creating a rivalry between them.

France Telecom plans to use Orange as its vehicle for competing in the wireless market by combining France Telecom wireless unit, Itineris, with Orange's operations, to create a wireless operator in Europe projected to have 30 million customers by year's end, second only to Vodafone's 35 million. Itineris is the largest wireless company in France, with more than 10 million subscribers, and operations in Denmark, Belgium, the Netherlands, Italy, Austria and Switzerland.

"The acquisition of Orange and the creation of New Orange is a major step in France Telecom's strategy to become a European leader and global player,'' said Michel Bon, chief executive of France Telecom.

The French company has faced a string of problems recently as it sought to expand throughout Europe. The most notable example of its recent trouble was its losing bid for E-Plus Mobilfunk, the German mobile phone company. France Telecom also failed to win a third-generation mobile license in Spain, limiting its ability to offer service there. And its alliance with Deutsche Telekom, the giant German telecommunications company, unraveled.

So combining with Orange is considered a major coup for France Telecom.

But the real winner may be Snook and the company he founded seven years ago. Orange started as the fourth entrant in Britain's highly contested wireless market and not only became highly coveted by its acquisitive rivals, but also has the highest growth rate in Britain. Snook will run the combined wireless company and have relative autonomy over its management.

The combined wireless company, which will be called New Orange, will be incorporated as a separate company based in London. France Telecom expects to sell shares of 10 percent to 15 percent of New Orange to the public within a year, valuing the company at 150 billion euros, or about $141 billion. It will be listed on exchanges in London, Paris and New York.

The stock part of the deal means Vodafone will own about 10 percent of France Telecom, but the French company will have the right to repurchase those shares. Under French law, no company can own more than 10 percent of France Telecom.

France Telecom will pay Vodafone about 55 percent of the acquisition price in cash and the rest in France Telecom shares. In addition, France Telecom will assume about $2.7 billion in debt and the $6.2 billion cost of Orange's third-generation mobile license in Britain that it won in a government auction.

France Telecom is effectively paying 6,741 euros for each Orange customer, significantly less than the 9,517 euros that Mannesmann paid for each Orange customer or the 9,198 euros that Vodafone paid for each Mannesmann customer.

The France Telecom-Orange deal was announced just as Vodafone reported that its fiscal 2000 earnings rose 30 percent. The company earned pounds 3.95 billion before interest, taxes, depreciation and amortization, compared with pounds 3.05 billion a year earlier.

Investors bid France Telecom stock up 4.5 euros, or 3.1 percent, to 148.9 euros, or $138.71.