France Telecom said Monday it would offer $4.94 billion to buy out minority shareholders in Wanadoo to take full advantage of surging profits at the Internet service provider.
The bid, which it said represents a 17.2 percent premium to Wanadoo's Friday closing price of 7.56 euros, values Europe's second-biggest ISP at around 13 billion euros and would give the parent company access to its cash pile of two billion euros.
France Telecom Chief Executive Thierry Breton aims to make the state-controlled firm's debts of about 44 billion euros more manageable by boosting cashflow from subsidiaries. The former monopoly bought out minorities of its mobile arm Orange last September.
Shares in France Telecom fell 3.4 percent to 21.99 euros while Wanadoo stock leaped 14.8 percent to 8.68 euros by 1149 GMT.
France Telecom said buying the 29 percent of Wanadoo it does not own would add 150 million euros annually to its earnings before tax, interest, depreciation and amortisation.
But analysts said the offer would dilute the parent company's earnings per share and disagreed on how sustainable the cost savings will be with France Telecom running a single Internet access operation under one roof.
"I'm not convinced of the synergies," one analyst said, noting that the brutally competitive Internet broadband market meant aggressive spending on marketing would be required for years to come.
France Telecom will bid seven of its own shares and 195 euros for 40 Wanadoo shares. It will also make a subsidiary cash-only bid of 8.86 euros per share, and a stock-only deal of seven France Telecom shares for 18 Wanadoo shares.
The main deal would create 76.9 million new France Telecom shares if the parent manages to acquire all Wanadoo shares in circulation. Fifty-five percent of the offer is in cash and 45 percent in shares.
Wanadoo controls British Internet firm Freeserve and Eresmas of Spain. It was floated at 19 euros in July 2000 but saw its shares sink to around three euros after the dotcom bubble burst.
Net profit jumped to 159 million euros last year and it said earlier this month it would pay a dividend for the first time. Wanadoo earned 30 million euros in 2002, its first annual profit, as it signed up more users for lucrative high-speed services.
The current year is shaping up to be tough, though, with growth affected by increased competition in France, where no fewer than seven rivals are nipping at its heels with competing offers.
France Telecom said it planned to spin off and float 30 to 49 percent of Wanadoo's phone directory business in the second quarter of this year, making the overall deal cash neutral for the heavily-indebted firm, despite an initial two billion-euro pay-out.
It said it could add a premium to the offer depending on the outcome of the phone directory IPO, and said Wanadoo shareholders who tender their shares to the offer would receive France Telecom's 2003 dividend payment of 25 euro cents.
France Telecom, which swung back to profit last year after a massive restructuring, said the Wanadoo bid was 22 percent above the average share price over the past month and 26 percent over the three-month average.
The offer will run from March 9 to April 13. France Telecom said it would lodge the bid with France's market regulator on February 25 and expected to get the green light on March 5.
Speculation over the buy-out has swirled in the market over recent weeks. France Telecom had not denied it was planning such a move but said earlier this month it was not imminent.
Some analysts had expected the dilution effect of a Wanadoo buy-out to whittle down the French government's stake in the firm to below 50 percent, but Breton said the state would still own 50 to 51 percent following the deal.
Shares in Equant, another France Telecom unit, rose 4.6 percent on speculation it could be next in line for a buy-out.
ABN Amro and BNP Paribas are advising France Telecom in the Wanadoo deal.