2006/621/EC: Commission Decision of 2 August 2004 on the State Aid implemented by France for France Télécom (notified under document number C(2004) 3060)   (Text with EEA relevance)
Date: 2004-08-02
Institutions: European Commission
Subjects: France, State aid, control of State aid, telecommunications industry

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Official Journal of the European Union

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COMMISSION DECISION

of 2 August 2004

on the State Aid implemented by France for France Télécom

(notified under document number C(2004) 3060)

(Only the French version is authentic)

(Text with EEA relevance)

(2006/621/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

— 10 April 2003: comments from AFORS Telecom

Having regard to the Treaty establishing the European Commu-
nity, and in particular the first subparagraph of Article 88(2)
thereof,

Having regard to the Agreement on the European Economic
Area, and in particular Article 62(1)(a) thereof,

Having called on interested parties to submit their comments
pursuant to the provisions cited above (1) and having regard to
those comments,

Whereas:

— 11 April 2003: comments from LDCOM

— 11 April 2003: comments from A (4)

— 10 April 2003: comments from Tiscali

— 11 April 2003: comments from WorldCom France (5)

— 11 April 2003: comments from B (6)

— 11 April 2003: comments from Bouygues ITS and

Bouygues Telecom (7)

— 14 April 2003: comments from Telecom Italia

1.

PROCEDURE

— 14 April 2003: comments from C (8)

(1)

(2)

(3)

(4)

By letter dated 31 January 2003, the Commission informed
France of its decision to open the formal
investigation
procedure provided for in Article 88(2) of the EC Treaty
(‘the opening decision’) in respect of financial measures
introduced by the French authorities for France Télécom
(‘France Télécom’, ‘FT’ or ‘the Company’) and in respect of
the business tax scheme applicable to that operator. A
description of the facts which led to the procedure being
opened is not included in this Decision (2).

The opening decision was notified to France on 31 January
2003. After a number of substantive errors had been
corrected, a corrigendum was notified to France on 7 March
2003.

communicated additional

France
information to the
Commission by letters dated 4 April 2003, 15 May 2003
and 29 January 2004.

The Commission's decision to open the procedure was
published in the Official Journal of the European Union (3).
The Commission invited interested third parties to submit
their comments on the aid measures in question.

(5)

The Commission received the following comments on the
subject from interested third parties:

— 29 April 2003: comments from B

— 30 April 2003: comments from LDCOM (9).

(6)

The Commission transmitted the comments to France on
16 May 2003, giving it the opportunity of commenting on
them.
received France's comments by letters dated
30 June and 29 July 2003 (10).

It

(7) On 30 May 2003, the Commission published an invitation
to tender for a contract ‘for the provision of services to
assist in assessing the compliance of the financial assistance
granted to France Télécom with the principle of the private
investor in a market economy and if necessary to analyse
France Télécom's recovery plan’ (11). By letter dated 3 July
2003, the French authorities wrote to the Commission
the above-mentioned invitation to tender. The
about
Commission replied by letter dated 24 September 2003.
On 24 September 2003, the contract for the provision of
services was awarded to the firm of consultants NERA
(‘NERA’, or ‘the consultant’). The French authorities were
informed of the expert's identity by fax dated 8 October
2003.

(8)

The Commission received other information and docu-
ments from the third parties listed below:

— 21 March 2003: comments from Cable and Wireless

plc and Cable and Wireless SA

— 23 June 2003: letter from LDCOM

— 25 June 2003: letter from D (12)

— 11 April 2003: comments from Cegetel

— 27 October 2003: letter from MCI

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— 16 October 2003: letter from ECTA

— 25 June 2003: letter from XXX

— 7 January 2004: letter from Bouygues Telecom

— 16 January 2004: letter from Bouygues Telecom (13)

— 19 March 2004: letter from France Télécom (14)

— 5 April 2004: letter from Tiscali

— 17 May 2004: letter from LDCOM

— 26 May 2004: letter from Bouygues Telecom (15)

— 22 June 2004: letter from France Télécom (16)

— 30 June 2004: fax from France Télécom

— 2 July 2004: fax from France Télécom.

(9)

The Commission requested additional explanations from
the French authorities by the following letters:

— 11 September 2003 (answer given by the French

authorities on 20 October 2003)

— 11 November 2003 (answer given by the French

authorities on 4 December 2003)

— 12 January 2004 (answer given by the French

authorities on 21 January 2004)

— 2 February 2004 (answer given by the French

authorities on 16 February 2004)

— 1 June 2004 (answer given by the French authorities

at the meeting on 16 June 2004).

(10) The Commission forwarded to the French authorities on
3 May and 14 June 2004 the letters referred to in
paragraph 8 and the NERA report of 28 April 2004 (‘the
NERA report’). The report is in two separate parts: (i) a legal
report by Professor Berlin; and (ii) an economic report.

(11) The Commission heard representatives of third parties at
various meetings during the course of the proceeding.

(12) The Commission and the consultant met with the French
authorities and France Télécom on 22 January and 16 and
23 June 2004.

the French authorities stressed that

(13) By letter dated 14 May 2004, which was confirmed on
3 June 2004,
the
opening decision did not cover all the facts forming the
subject-matter of the Commission's investigation. By email
dated 9 June 2004, which was confirmed by letter dated
10 June 2004, the French authorities submitted comments
on the NERA report, which were supplemented by letter
dated 21 June 2004.

2.

DESCRIPTION OF FRANCE TELECOM

economic entity. Since the beginning of the proceeding,
the Commission has referred to the Company's consoli-
dated accounts. In adopting this approach, the Commission
is taking a line which is consistent with economic reality as
reflected by the market, which assesses France Télécom's
its
performance and financial strength on the basis of
consolidated results. In the opening decision, the France
Télécom group was described as
(unofficial
translation from the original French):

follows

legal

personality.

endowed with

‘Originally part of the Ministry of Posts and Telecommu-
nications, France Télécom was formed in 1991 as a public
operator
Since
31 December 1996 the operator has had the status of a
public limited company, and since October 1997 it has
been listed on the First Market of Euronext Paris SA and on
the New York Stock Exchange (NYSE). In 2002, the State
held a majority stake in France Télécom of 56,45 %, the
remainder being divided between the public (32,25 %),
France Télécom itself
the
Company (3,04 %) (17).

(8,26 %) and employees of

an operator and a

France Télécom is
supplier of
telecommunications services, active in France and through-
out the world with a presence in the following markets:
fixed telephony, mobile telephony, the Internet and other
information services, services to business, TV broadcasting
and cable TV. Following the reorganisation of Orange plc
and the formation of Orange SA as France Télécom's main
mobile telephony subsidiary,
its placing on the stock
exchange and the placing on the stock exchange of
Wanadoo SA, France Télécom's activities are henceforth
organised in four segments: (i) Orange; (ii) Wanadoo; (iii)
fixed, voice and data services in France; and (iv) fixed, voice
and data services outside France, mainly through its
subsidiary Equant.

At the end of 2001, France Télécom employed 211 554
people worldwide, including 146 882 in France’ (18).

(15) The above description remains valid for the period covered
by this Decision. During that same period, the group's
structure was characterised by ‘a policy of out-and-out
subsidiarisation through the
listed
companies centred on France Télécom: Orange, Wanadoo,
TPSA in Poland and Equant. The group thus took shape in a
quite paradoxical and unbalanced manner, with the parent
company France Télécom SA carrying all the debt while the
subsidiaries concentrated on growth …’ (19).

creation of

four

3.

CHRONOLOGICAL DESCRIPTION OF THE FACTS

AND FINANCIAL SITUATION OF THE COMPANY

3.1.

The data known during the first half of 2002

and events at that time

(14) As indicated in the opening decision, the present proceed-
the France Télécom group as a single

ing concerns

(16) The Commission would point out that the analysis under
the state aid rules of a State's conduct must be carried out

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the State's conduct,

using the data and information available at the time of each
state intervention. Given that the present case concerns
events occurring in 2002 and early 2003, it is essential, in
order to understand the facts on which the Commission has
based its analysis of
to set out
chronologically the evidence available from the time of
publication of the results for the 2001 financial year. The
financial results for the first half of 2002 were not made
public until 13 September 2002. Before that date, the last
financial results to have been published by France Télécom
were those for the 2001 financial year. However, some
additional data emanating from financial analysts were to
be found in the latters' forecasts, opinions and recommen-
dations.

(17) As is clear from the analysis below, France Télécom was,
from June 2002 onwards, a company with serious

these accounts

structural problems and an unbalanced balance sheet.
During the first quarter of 2002, the nature of
these
problems was revealed by the publication of the 2001
accounts. The publication of
showed
improved operating results and substantial cash flow
it also pointed up the heavy
generation. Nevertheless,
weight of the past, which wiped out the net result before
exceptional provisions of EUR 1,9 billion, turning it into a
EUR 8,3 billion loss. While the provisions correct the value
of France Télécom's assets to a more realistic level, the
colossal size of the debt, at EUR 63 billion, persists. This
context, together with the inadequacy of the expected cash
flow, helps explain the serious structural problems. This is
clearly demonstrated by the HSBC study submitted by
France Télécom (see Section 4), which calculates a financing
requirement of EUR 35 billion over the period 2002-05.

(18) On 31 December 2001, France Télécom's net debt came to EUR 63,5 billion, as can be seen from Tables

1 and 2.

Table 1

Debt (leverage) ratios

Debt ratio (1)

Debt/equity (2)

Times interest earned (3)

1999

0,78

3,61

14,52

2000

0,89

8,25

5,39

2001

0,92

12,16

3,2

Source: NERA.
(1) NERA: ‘The debt ratio is defined as the ratio of long term debt to total long term capital (debt and equity)”
(2) NERA: ‘The debt-equity ratio is calculated as the ratio of long-term debt to equity”
(3) NERA: ‘The “times-interest-earned ratio” or “interest cover” measures the extent to which interest is covered by earnings before
interest and taxes (EBIT) plus depreciation. The measure gives a level of the adequacy of cash flow generation and the consequent
comfort a company enjoys in meeting its interest payments”

Table 2

Bonds falling due from the third quarter (Q3) of 2002 to the fourth quarter of 2003

2002

2003

Q3

Q4

Q1

Q2

Q3

Q4

Total 2003

Amount in EUR billion (1)

3,89

3,61

8,86

4,08

4,09

2,23

19,26

Source: NERA.
(1) NERA: ‘Calculations based on data supplied by France Telecom. Figures include bond and commercial paper interest and principal
(interest on commercial paper was computed from 25 July 2002 to 31 December 2003 due to data unavailability for previous
dates)”

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(19)

its balance sheet

In the light of these data, the Commission would observe
that, in view of the scale of its debt, France Télécom was
forced to announce, on 21 March 2002, not only a major
clean-up of
through balance sheet
provisions and asset disposals totalling EUR 27,2 billion
(comprising disposals worth EUR 17 billion and excep-
tional provisions of EUR 10,2 billion), but also a substantial
increase in the available cash flow to the tune of EUR 14
billion for the period 2002-05.

(24) On 24 June 2002, Moody's downgraded France Télécom's
rating. The Company's prospective rating was maintained at
a negative level (25). Moody's decision at that time was
based on the fact that the agency did not expect France
Télécom and Orange to be in a position to generate
sufficient cash flow to reduce the group's consolidated debt.
Although Moody's was not concerned about the likelihood
of a liquidity crisis in the Company in the immediate future,
it did point out that France Télécom was confronted with
debts of about EUR 15 billion falling due in 2003.

3.1.1. The downgrading of France Télécom's credit rating

(20) During the first half of 2002, France Télécom's situation
worsened rapidly, as reflected in a series of downgrades in
the Company's credit rating. Thus, on 27 March 2002, the
Moody's credit rating agency announced a downgrading of
France Télécom's rating for long-term debt (20)/ (21).

(25) On 25 June 2002, Standard & Poor's downgraded France
Télécom's short- and long-term debt rating (26), basing its
decision on the difficulties concerning Mobilcom and the
Company's inability to reduce its debt far and fast enough. S
& P also mentions France Télécom's considerable financing
requirements, referring also to the EUR 15 billion of debt
coming due in 2003.

(21) On 28 March 2002, Standard & Poor's (‘S & P’) maintained
France Télécom's rating but downgraded its prospects to
negative (22) following news concerning Mobilcom.

(22) On 13 May 2002, Moody's, doubting the Company's
strategy,
its
capacity
announced a possible downgrade of France Télécom's
short-term debt rating (23).

debt-reduction

implement

to

(26) This downward trend was confirmed several times (27) over
the next few days. On 12 July 2002, Standard & Poor's even
drew attention to a potential problem involving the
refinancing of
the debt coming due in 2003. The
downgrading of France Télécom's rating clearly revealed
the Company's debt problems (28), worsened by the
uncertainty surrounding Mobilcom.

(23) On 14 May 2002, Standard & Poor's maintained France

Télécom's existing rating (24).

(27) Table 3 recapitulates the various positions of S & P, Moody's and Fitch regarding France Télécom's rating:

Table 3

Events connected with credit ratings

S & P

Moody's

Fitch

Short
term

A2

Long term

Short term

Long term

BBB+

P2

P3

Baa1

Baa3

Short
term

F2

Long term

BBB+

A3

BBB

BBB-

F3

BBB-

Situation in May 2002

24 June 2002

25 June 2002

05 July 2002

12 July 2002

Source: NERA.

3.1.2. Analysis of credit spreads

(28)

It is important that the behaviour of spreads in the financial
markets be examined. The spreads relating to the debt of a
company reflect the assessment, by the markets, of the risk

linked to the capacity of
its
obligations in respect of the payment of interest and the
the debt upon maturity. Spreads
reimbursement of
influence the valuation, by the market, of bonds and the

the company to meet

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level of interest that may be required for the issue of new
bonds. A widening of the spreads indicates an increase in
the risk attributed to the issuer and/or the bond. The
Commission has analysed France Télécom's spreads for the
period covering the 2002 financial year and has established
a relatively high assessment of the risk at the beginning of
July.

(29) Normally, the spreads for long-term debt are greater than
those for short-term debt, with several factors coming into
play here:
lack of visibility, uncertainty as to future
prospects, macroeconomic parameters, and the trend in

study concerning France Télécom has

interest rates. However, an examination of Table 3 shows
clearly that the problems encountered by France Télécom
were particularly concentrated on short-term debt. The
spreads
thus
demonstrated that the very short-term risks were higher
than those in the medium and long term. This phenom-
enon is called a ‘spread inversion’. The frequency of these
inversions, during which debt coming due in one year was
considered by the market to be more risky than three-year
debt, was particularly evident during the period July-
September 2002.

(30) Table 4 provides a graphical representation of the behaviour of France Télécom's spreads.

Table 4

Credit spreads for bonds with a 1- and 3-year maturity — France Télécom

Source: Bloomberg.

(31) A different way of observing the increased risk associated with France Télécom's debt is to study the price
of its bonds. Table 5 shows a subset of France Télécom's bonds. The fall in the price of the bonds in June/
July 2002, which is a mirror image of the increase in the credit spreads, reflects a lesser value of France
Télécom's debt due to the increased risk of default perceived by the market.

Table 5:

Price of France Télécom's bonds from 1 May 2002 to 24 July 2002

Source: Bloomberg.

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(32)

It is clear, moreover, that, despite the difficulties of a few other operators in the telecommunications
sector in Europe, the difficult situation with which France Télécom was faced was a direct result of the
state of its balance sheet and financial structure.

(33) This is highlighted by a study of the spreads of Deutsche Telekom and KPN, as shown in Tables 6 and 7.

Table 6:

Credit spreads for bonds with a 1- and 3-year maturity — KPN

Source: Bloomberg.

Table 7:

Credit spreads for bonds with a 1- and 4-year maturity — Deutsche Telekom

Source: Bloomberg.

(34) This study reveals that Deutsche Telekom also experienced spread inversions, but they were of short
duration only and on a much smaller scale. The levels attained by France Télécom during the period June/
July 2002 were much higher.

3.1.3. France Télécom's share price

(35) At the same time, France Télécom's share price fell significantly during the first half of 2002, reaching its
lowest level first on 27 June 2002 (EUR 7,79), and then on 30 September 2002 (EUR 6,01), as can be
seen from Table 8.

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Table 8:

France Télécom's share price

Source: Bloomberg.

3.1.4. The events of July 2002

(38)

(36)

In an interview published in Les Échos on 12 July 2002, the
French Minister for Economic Affairs, Finance and Industry
(‘the Minister for Economic Affairs and Finance’) said that:
‘The State shareholder will behave like a prudent investor
and would take appropriate steps if France Télécom were to
face any difficulties … I repeat, if France Télécom were to
face any financing problems, which is not the case today,
the State would take whatever decisions were necessary to
overcome them’ (29).

In its press release of 12 July 2002, S & P states that the
reason why it had decided to continue France Télécom at
investment grade was to do with the State's indications as to
its intentions towards the Company: ‘France Télécom could
face certain difficulties refinancing its debt obligations
coming due in 2003. Nevertheless, the State's indication
underpins France Télécom's investment-grade credit qual-
ity’. This assurance had been provided, firstly, directly by the
French Government to S & P: ‘the French State — which
owns 55 % of France Télécom — has made clear to
Standard & Poor's that it will behave as an aware investor
and would take appropriate steps if France Télécom were to
face any difficulties. France Télécom LT rating cut
to
BBB-’ (31).) and, secondly, publicly in the interview referred
to in paragraph 36.

(37) On that same day, as indicated above, S & P downgraded
France Télécom's rating to BBB-. This downgrade was
nevertheless limited to a rating still qualifying as investment
grade: any further downgrade would have led to the
Company's debt being accorded junk-bond status, as being
no longer of
that France
investment grade. The fact
Télécom's rating was being kept at investment grade was
commented on by Goldman Sachs in a report dated 22 July
2002, which states that France Télécom was about to be
downgraded to junk-bond level by S & P and Moody's (30).

(39)

In the light of the above, there is no question but that in
July 2002 France Télécom was facing a crisis of confidence.
Rating agencies and analysts alike were convinced that the
the
Company risked not being able
refinancing plan presented by the management in order
to meet its maturities. The Company was therefore faced
with an acute financing problem linked to its indebted-
ness (32). Nevertheless, the agencies had maintained the
Company's rating at investment grade on the strength of
the State's indications. A downgrading of the rating would

to implement

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‘It will be in June 2003,

have worsened the crisis and lessened the Company's ability
to cope. In the words of the group's former CEO, Mr Michel
Bon:
that France
Télécom's financing problems may become critical or even
insurmountable. If, between now and then, France Télécom
(owing to its
has not regained access to the market
penalising rating), the State will have to find ways of
helping it to refinance itself’ (33).

therefore,

3.2.

The data published on 13 September 2002 and

events at that time

3.2.1. The data published on 13 September 2002

(40) The conclusion set out in paragraph 39 was confirmed
retroactively in September 2002 when France Télécom's
half-yearly accounts were presented. From its scrutiny of
the half-yearly accounts published on 13 September 2002,
the Commission notes an improvement in France Télécom's
figures for the first half of 2002 compared with the
previous year: an increase of 10 % in turnover, 13,2 % in
EBITDA and 17,3 % in the operating result. The Commis-
sion notes also the sustained growth in mobile telephony
and the improved performance of the Internet business.
However,
the fixed telephony
segment in France, which accounted for 31 % of turnover
for the same period, was down by 12,2 %.

the operating result of

(41) Alongside the good operating results described above,
France Télécom confirmed the imbalance in its financial
situation. The negative result of EUR 12,2 billion as at
30 June 2002 was primarily due to the substantial
provisions made for investments. As a result of this half-
year loss, from being positive overall France Télécom's
consolidated own funds became negative as at 30 June
2002 to the tune of EUR 440 million.

(42) A simplified analysis of cash flow as at 30 June 2002 shows
that net debt increased during the first half of 2002 by EUR
6,3 billion inasmuch as EBITDA, at EUR 6,870 billion, did
not cover expenditure represented by:

— debt interest (EUR 3 099 million),

— investments (EUR 3 820 million),

— the repurchase of France Télécom shares

from

Vodafone (EUR 4 973 million),

— the repurchase of Orange shares from E.On (EUR 950

million), and

— the payment of taxes (EUR 608 million).

Table 9

30 June 2002

Exchangeable or convertible bonds

Bonds

Leasing operation

Bank loans

Other, non-bank loans

Drawings on syndicated loans of EUR 15 billion

Drawings on syndicated loans of USD 1,4 billion

Other bank overdrafts and other short-term
borrowings

Total gross debt

Movable investments

Cash in hand

Net indebtedness

EUR billion

10,75

39,85

0,42

6,62

0,72

8,15

1,48

4,14

72,13

(0,15)

(2,29)

69,69

Source: France Télécom's consolidated accounts: half year ended 30 June
2002.

(44) The maturity schedule of this debt is characterised by its
short duration. Thus, EUR 12,9 billion of debt comes due
in 2003, including EUR 10,5 billion worth of bonds (34),
EUR 1,0 billion worth of loans to subsidiaries, and EUR 1,4
billion worth of private investment.

(45) During the first half of 2004, EUR 5,5 billion worth of
bonds and EUR 6,4 billion worth of credit lines (EUR 1,4
billion and EUR 5 billion of the EUR 15 billion back-up
facility) came due, giving a total of EUR 11,9 billion. France
Télécom was therefore faced with having to repay EUR 24,8
billion between 1 January 2003 and 30 June 2004.

(46) During the second half of 2004, EUR 2,8 billion worth of
bonds and EUR 2,6 billion worth of loans to subsidiaries
will come due, giving an amount of EUR 5,4 billion and a
total amount of EUR 17,4 billion for 2004 as a whole.

(47)

In 2005, lastly, EUR 8,5 billion worth of bonds, an amount
of EUR 10 billion corresponding to the balance of the EUR
15 billion back-up facility, and an amount of EUR 0,1
billion relating to private investments will come due, giving
a total of EUR 18,6 billion during the course of 2005.

(43) Of a net indebtedness of EUR 69,69 billion as at 30 June
2002, the bulk, or EUR 50,6 million worth, is made up of
bonds. Table 9 gives a breakdown, by major category, of the
various components of the debt.

(48) During the period 2003-05, France Télécom will be faced

with a total repayable debt of EUR 48,9 billion.

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(49) As was mentioned in the opening decision, the Commis-
sion would point out that France Télécom's debt stems
mainly from the massive acquisitions engaged in by the
Company as from 1999 (35), which were financed primarily
out of cash (36). More than EUR 100 billion was thus spent
by France Télécom in its quest for growth, 80 % of which
was paid for in cash (37).

(50) The Commission would also point out that the Company's
external growth was focused on the mobile telephony
sector (38)(including the acquisition of Orange plc (39),
which was the most costly, and the Mobilcom transac-
tion (40), without forgetting the other transactions involving
fixed telephony (e.g. TPSA (41), the Internet (Freeserver) or
cable (NTL) (42).

3.2.2. September 2002

financial

(51) On 12 September, the Government announced that it had
accepted the resignation of France Télécom's CEO, Mr
Michel Bon, but remained silent about the appointment of a
new CEO (43). On 13 September, the Government reiterated
in a press release its support for the Company and expressly
indicated that it had decided to take part in a forthcoming
operation aimed at increasing France Télécom's own funds:
‘… After the exceptional
losses of the first six months,
France Télécom is faced with a serious shortage of capital.
situation is weakening the company's
This
potential. The Government
is therefore determined to
exercise its responsibilities to the full. … Taking note of the
new situation brought about by the considerable deteriora-
tion in the accounts, Mr Bon has tendered his resignation to
the Government, which has accepted it. The resignation will
take effect at a board meeting to be held in the next few
weeks, at which a new chairman will be presented … The
new chairman will in a very short space of time propose to
the board a plan for improving the company's accounts,
enabling its debts to be reduced and its financial structure
to be restored while maintaining its strategic advantages.
The State will help France Télécom implement this plan and
will contribute to a very substantial strengthening of the
company's capital base, according to a timetable and in a
manner to be determined in the light of market conditions.
In the meantime, the State will, if necessary, take steps to
prevent the company from being faced with any financing
difficulties …’ (44).

(52) That same day, Moody's changed the outlook of France
from negative to stable owing to the

Télécom's debt
restated commitment to support the Company (45).

3.2.3. October 2002

(53) On 2 October 2002, the Government appointed Mr Thierry
Breton CEO of France Télécom. A press release of the
Minister for Economic Affairs and Finance announced the
appointment. In the same press release, the Government

‘On a proposal

from the
repeated its commitments:
company's board of directors, the Council of Ministers
has decided to appoint Thierry Breton chairman of France
Télécom … To that end, the new chairman will immediately
carry out an inventory of the company, the findings of
which will be communicated to the board in the weeks
ahead and which will form the basis for a financial recovery
and strategic development plan enabling the company's
debt to be reduced while building on its strengths. Within
this framework, Thierry Breton will enjoy the support of
the State in its capacity as shareholder, determined as it is to
exercise its responsibilities to the full. The State will assist in
implementing the recovery measures and will contribute,
for its part, to the strengthening of the company's own
to be determined in close
capital base in a manner
collaboration with the company's chairman and board. As
already indicated, the State will, if necessary, take steps to
prevent the company from being faced with any financing
difficulties’ (46).

3.2.4. December 2002/January 2003

(54) On 4 December 2002, at a meeting of the Company's
board, an action plan entitled Ambition FT 2005 (47)(‘the
Ambition 2005 plan’) was presented by France Télécom's
new management, being aimed, according to the French
authorities (48), at bringing about a noticeable improvement
in the Company's operational performance and offering the
prospect of a satisfactory return on capital invested. Thus,
to meet France
the medium-term objectives were (i)
Télécom's financing requirements; and (ii) to achieve a net
reduction in debt and a reconstitution of capital, a sine qua
non for the Company's rehabilitation in the long run in
terms of borrowing on the stock market. In the HSBC
‘Assuming a business plan which
report, it is stated that:
incorporates the operational
in the TOP
that France Télécom has a
programme, we consider
refinancing requirement over
the period 2002-07 of
approximately €22 billion ... [On the other hand], assuming
a business plan which does not incorporate the operational
improvement in the TOP programme, we estimate that
France Télécom has a refinancing requirement over the
period 2002-07 of approximately €35 billion’.

improvement

(55) The key elements of the plan in question and the measures
which the French authorities envisaged adopting with
regard to France Télécom were notified to the Commission
by letter dated 3 December 2002 and additional informa-
tion was submitted by letters dated 14 and 15 January
2003. A detailed description of the Ambition 2005 plan
and its various aspects (operations, debt renegotiation and
strengthening of the Company's capital base) as well as of
the other measures envisaged by the French authorities is
given in the opening decision and is not repeated in this
Decision.

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(56) The presentation of

release of

the Minister

the Ambition 2005 plan was
accompanied by a press
for
Economic Affairs and Finance in which the Government
confirmed its support for the plan, its commitment to take
part in the operation to strengthen the Company's capital
base and the making-available of a shareholder loan in the
form of a EUR 9 billion credit line. The parts of the press
release that are relevant to this Decision are as follows:
‘Francis Mer, Minister for Economic Affairs, Finance and
Industry, confirms the State's support for the action plan
approved by France Télécom's board of directors on 4
December. 1/The France Télécom group is a coherent
industrial entity with a remarkable track record. However,
the company is now faced with an unbalanced financial
structure and a need for capital and refinancing in the
medium term. This state of affairs is due to the failure of
past investments, which were carried out badly at the
height of the financial “bubble” and, more generally, to the
market downturn. The impossibility for France Télécom to
finance its growth otherwise than through debt has made
the situation worse. 2/The State, as majority shareholder,
has asked the new management to restore the company's
financial equilibrium while maintaining the group's integ-
rity … 3/In the light of the action plan drawn up by
management and the investment return prospects, the State
will participate in the EUR 15 billion strengthening of the
company's capital base in proportion to its share in the
capital, giving an investment of EUR 9 billion. The State
shareholder thus intends to act like a prudent investor. It
will be for France Télécom to work out
the detailed
arrangements and precise timetable for the strengthening of
its capital base. The Government wants the utmost account
to be taken during the operation of
the situation of
individual shareholders and of employees with shares in the
company. To enable the company to launch a market
operation at the most opportune moment, the State is
prepared to make an upfront prepayment towards the
strengthening of the capital base in the form of a temporary
shareholder loan, remunerated at market rates, placed at
France Télécom's disposal. 4/The State's entire shareholding
in France Télécom will be transferred to a public industrial
and commercial entity, ERAP. The latter will borrow on the
financial markets in order to finance the State's share in the
strengthening of the company's capital base’ (49) .

(57) A few days after the presentation of the Ambition 2005
plan, France Télécom launched two successive bond issues
on 11 and 12 December 2002 for a total amount of
EUR 2,9 billion. The first bond issue was for a total amount
of EUR 2,5 billion over seven years, at a fixed rate of 7 %, or
Euribor + 290bp. For France Télécom, the cost of the fixed-
rate tranche is 7,165 % (all-in). The second bond issue was
placed on the pound sterling (GBP) market for an amount
of GBP 250 million at a fixed rate of 8 % over 15 years, or
LIBOR + 330bp (50). Other issues were made on 15 January
2003 for a total amount of EUR 5,5 billion (51). These were
part of a three-tranche issue (EUR 1 billion at a fixed rate of
6 %, scheduled to mature in 4,7 years; EUR 3,5 billion at a
fixed rate of 7,5 %, scheduled to mature in 10 years; and
EUR 1 billion at a fixed rate of 8,125 %, scheduled to
mature in 30 years). On 10 February 2003, that part of the
EUR 15 billion syndicated loan which had matured, namely
approximately EUR 5 billion over three years at the rate
Euribor + 125bp, was renewed.

(58) On 17 December 2002, S & P indicated that, since July
2002, the Government's support had been a key factor in
maintaining France Télécom's investment-grade status (52)
and that its announcement concerning the shareholder loan
and the commitment to subscribe,
in proportion to its
shareholding, to a EUR 15 billion recapitalisation operation
had confirmed that support (53).

3.2.5. February/March 2003

(59) France Télécom ended the 2002 financial year with a loss
of approximately EUR 21 billion and a net financial debt of
almost EUR 68 billion.

(60) On 4 March 2003,

the operation to strengthen the
Company's capital base by EUR 15 billion as envisaged by
the Ambition 2005 plan was launched. The operation was
broadly successful and was terminated on 11 April. On
14 April 2003, the State held 58,9 % of France Télécom's
capital, of which 28,6 % through ERAP.

(61) The Commission notes that the capital increase largely met
the structural needs of France Télécom's financing. Thus,
following the operation, France Télécom's credit rating
began to improve: on 14 May 2003 S & P raised its rating
to BBB, outlook stable (from A-3 to A-2 for its short-term
rating) and on 8 August 2003 Fitch raised its rating from
BBB- to BBB. The Commission would point out in this
connection that the agencies thereupon ceased to consider
the State's support to be a key factor in the Company's
credit rating (54).

4.

COMMENTS FROM THIRD PARTIES

(62) The Commission has received comments from a number of
interested third parties. The essence of those comments is
reproduced in this section.

4.1.

Comments from Telecom Italia

(63) Telecom Italia stresses that any aid granted to France
Télécom is likely to affect competition in the telecommu-
nications markets, and in the French market in particular. It
is therefore essential that the aid granted by the French
authorities
should be accompanied by compensatory
measures aimed at reducing its impact on competition. In
this context, it would be particularly appropriate to adopt
regulatory measures making for easier and speedier access
by new entrants and their use of France Télécom's
infrastructures, particularly as regards access to the local
to negotiate
loop and the length of
interconnection and provisioning agreements.

time it

takes

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4.2.

Comments from WorldCom

received an advantage which it would not have
obtained under market conditions.

(64) WorldCom indicates

that

shares

the Commission's
it
analysis as set out in the opening decision. It points out
that the aid granted by the State to France Télécom enabled
the latter to obtain the liquidity it needed to reimburse its
debt without having to dispose of any strategic assets. It
adds that the support of the State enabled France Télécom
to ensure the continuance of its industrial strategy, that is to
say, the creation of a series of vertically integrated operators
of telecommunications networks and services. WorldCom
concludes that this industrial strategy entails anticompeti-
tive practices, including the existence of cross-subsidies and
of a price squeeze between the price proposed by France
Télécom to the final customer and the price of access
proposed to competitors of the historical operator, and the
possibility of making tailor-made bids that are impossible
to match when public contracts are being awarded (the
‘Sipperec’ and ‘public assistance/Paris hospitals’ contracts
being two such examples).

(65)

In order to reduce the distortions of competition caused by
the aid granted to France Télécom, WorldCom proposes
compensatory measures of a structural nature, including
the disposal of assets such as Global One/Equant, Orange,
Wanadoo/Oléane and/or the local network in France, or
else the effective and transparent separation of France
Télécom from its commercial activities. Under the heading
of behavioural quid pro quos, WorldCom mentions a to-be-
wished-for accounting segregation between France Télé-
full
com's commercial and non-commercial activities,
publication of its accounts and a monitoring of its prices.

4.3.

Comments from C

(66) C submits the following comments:

(a)

the measures at issue constitute state aid. C argues
that, in accordance with the Guidelines on state aid for
rescuing and restructuring firms in difficulty (55)(‘the
Guidelines’), where public funding is provided to a
firm which is in financial difficulties there is a
presumption that state aid is involved. C states that
the announcement of and terms governing the
making available by the French State to France
Télécom of the EUR 9 billion credit line and the
participation by the French State in the recapitalisa-
tion of France Télécom involve aid elements. It points
out that the prudent investor test is not satisfied as
regards the arrangements for providing the credit line
inter alia because of the interest rate proposed and the
amount of the commitment fee. It also points out that
the principle of concomitance has not been complied
with in so far as the French authorities granted the
credit line and announced their participation in the
recapitalisation prior to the announcement of
the
Ambition 2005 plan and prior to the firm commit-
ment of the investors. Inasmuch as France Télécom's
competitors are not in a position to raise capital on
these terms and on such a scale, France Télécom has

(b)

the measures at issue cannot be considered compa-
tible within the meaning of the Guidelines. Alterna-
tively, C takes the view that the aid granted should be
strictly limited to that which is necessary to ensure
France Télécom's viability and that it must not help to
finance France Télécom's aggressive expansion. C adds
that France Télécom's privatisation would ensure
compliance with the ‘one time last time’ principle
applicable to restructuring aid. It draws the Commis-
sion's attention to the distortions of competition in
the German telecommunications market caused by
the aid measures and proposes, by way of compensa-
tory measures within the meaning of the Guidelines,
the sale of all or part of France Télécom's subsidiary
Orange.

4.4.

Comments from A

(67) A points out that, as indicated in the opening decision, the
State's intention of restoring France Télécom's financial
health by granting a EUR 9 billion shareholder loan and the
provision by the State to France Télécom of an ‘intangible’
guarantee covering its bond issues are measures which do
not satisfy the prudent private investor test and which
contain aid elements. It adds that France Télécom's policy
regarding the collection of royalties for its patents also
contains aid elements.

4.5.

Comments from Bouygues and Bouygues

Télécom

(68) Bouygues and Bouygues Télécom submit the following

comments:

(a)

the Company's critical

Bouygues Telecom points out that the unfailing and
irrevocable support of the State is the cornerstone of
France Télécom's recapitalisation plan, which has led
recovery. Thus, according to
to the Company's
Bouygues Telecom, only the French State could, in
view of
financial situation,
restore the markets' confidence and create a virtuous
circle enabling it to meet its short-term commitments
and launch a huge recapitalisation operation under
favourable economic conditions. In Bouygues Tele-
com's opinion,
the following measures satisfy the
requirements of Article 87(1) of the Treaty and hence
constitute state aid:

(i)

the
for
statements made by the Minister
Economic Affairs and Finance during the period
from 12 July to 4 December 2002 constitute a
state guarantee committing the State's resources;

(ii)

the shareholder
loan and the operation to
strengthen the Company's capital base commit
state resources;

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(iii)

issue confer advantages on
the measures at
France Télécom which it would not have
obtained under normal market conditions;

position in principle on the general value of a unilateral
commitment as a source of obligation, it does recognise the
value thereof on a case-by-case basis.

(iv)

the measures at issue do not satisfy the test of a
prudent private investor operating under normal
market conditions;

(73)

(v)

the measures at issue affect competition;

(vi)

the measures at issue affect intra-Community
trade.

(b)

the measures at issue cannot be considered compa-
tible within the meaning of the Guidelines.

(69) As a preliminary remark, Bouygues Telecom observes that
the policy of expansion carried out in 2000 in the mobile
telephony sector with encouragement from the State led to
the operator's financial and economic
a worsening of
situation, which an initial savings drive did not succeed in
containing.

(70) As regards the statements by the Minister for Economic
Affairs and Finance, the unfailing and repeated support of
the State, expressed in a series of announcements from
12 July 2002 to 4 December 2002 and supplemented by a
series of measures including the opening of the EUR 9
billion credit line and the irrevocable commitment by the
State to participate in a capital increase in proportion to its
shareholding in the Company, amounts to a commitment
on its part, from which it cannot withdraw, to make good
by all available means any failure by the Company to meet
its financial commitments. Bouygues Telecom stresses here
that this commitment constitutes a veritable state guarantee
producing legal effects committing the State's resources. It
adds that the State's guarantee is unlimited in amount and
time.

(71) Bouygues Telecom refers in this connection to the Crédit
Foncier de France (CFF) decision (56), in which the Commis-
sion found that the public declarations by the Government
had the object and effect of reassuring the bank's creditors
about the quality of their loans and could not be considered
— as the French authorities maintained — to be a mere
political commitment without any legal value. Bouygues
Telecom thus states that, in that case, the declarations of
support had the effect of reassuring those of CFF's creditors
who had not yet demanded the immediate repayment of
their loans, of avoiding the need for CFF to use the credit
line opened by the State on its behalf and of enabling the
latter to devise and implement a restructuring plan.

(72) Bouygues Telecom points out,

that

furthermore,

the
Community-law approach is borne out by an analysis of
domestic law. Under French commercial law, such declara-
tions of support may be likened to letters of intent, which,
as can be seen from recent case law, the courts equate with
actual guarantees (57). Bouygues Telecom adds that, even if
the French Court of Cassation has not yet adopted a

In preparing its comments, Bouygues Telecom called on the
services of an expert (58) who stated that it followed from a
long line of judgments by the French administrative courts
that the existence of a commitment entered into by an
administrative authority must be assessed in the light, not
of the commitment's form, but of its intrinsic character-
istics. The expert remarked that that case law was expressly
applied in the specific case of declarations: the adminis-
trative courts thus considered that, even where they were
not accompanied by any specific legal act, the promises
constituted commitments as they were the embodiment of
the administrative authority's will. For
there to be a
commitment on the part of the State, it was sufficient for
the authority to have behaved in such a way as to convince
others that it would act in a certain manner. It mattered
little, therefore, whether the commitment was written or
verbal or whether it could simply be deduced from the
authority's conduct, the only condition laid down by the
administrative courts being that the promise in question
must be firm and precise or sufficiently persuasive.

(74) Bouygues Telecom's expert stated that, in the present case,
the declarations by the Minister for Economic Affairs and
Finance satisfied all the criteria for being characterised as a
commitment by the State. In each of his declarations, the
Minister manifested his wish to lend France Télécom his
unconditional support — in accordance with procedures
which, moreover, were expressly specified: the strengthen-
ing of the Company's capital base, the taking of measures
enabling the Company to avoid any financing problems,
and the recourse to ERAP, to which would be transferred
the State's entire shareholding. Inasmuch as those declara-
tions were firm and precise and made without reservations,
they could be construed as constituting commitments by
the State. Furthermore, because the Minister had had his
declarations published, they could not be mere declarations
of intent.

(75) Bouygues Telecom's expert

stressed that,

since those
promises could be construed as constituting commitments
by the State, they had by their very nature legal value and
were of such a character as to render the State liable,
whether they were legal or not, vis-à-vis France Télécom, its
creditors and its employees.

(76) Bouygues Telecom maintains that the declarations made by
the French Government on and after 12 July 2002 are
‘administrative acts’ binding on the State which are of such
a character as to render the State answerable before the
administrative courts. The latter thus have to judge any
conduct of the authorities through the resulting adminis-
trative acts, whatever
they cause
damage or not, and the effects of which stem either from a
modification of the regulatory set-up or from an effect on
the personal situation of the plaintiff. Bouygues Telecom

their form, whether

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also submitted to the Commission on 26 May 2004
another study (59) which also comes to the conclusion that
the declarations by the State constitute the expression of a
formal, precise and irrevocable commitment by the State —
legally sanctionable, where appropriate, via the incurment
of the liability of the State should it be at fault in failing to
respect its commitments towards France Télécom.

the month of

June 2002 and France
narrowed after
Télécom was able to stagger its debt maturities and face up
to the liquidity wall. Bouygues Telecom stresses that, not
only did the guarantee make possible France Télécom's very
recourse to the financial market, but it also enabled the
bond issues to be made at a rate which did not reflect
France Télécom's true financial situation.

(77) Bouygues Telecom states that there is therefore no doubt
that the measures at issue constitute, not psychological
support as the French authorities have maintained, but a
guarantee legally binding on their author.

(78) Bouygues Telecom states lastly on this point

the
binding nature of the declarations made by the State by way
of the guarantee is confirmed by a circular of the Ministry
of Economic Affairs and Finance dated 22 July 2003 which
expressly refers to the existence of implicit guarantees (60).

that

(79) With regard to the shareholder loan and the operation to
strengthen the Company's capital base, Bouygues Telecom
maintains that, firstly, the opening of a EUR 9 billion credit
line for the benefit of France Télécom and, secondly, the
irrevocable commitment by the State to participate in any
future capital increase in proportion to its shareholding in
the Company followed by the recapitalisation operation as
such, are the implementation of the state guarantee and are
financed by state resources. In this connection, Bouygues
Telecom adds that the recourse to ERAP in the granting, by
the French authorities, of a EUR 9 billion credit line for the
benefit of France Télécom in no way alters the state origin
of the funds. It points out that the recourse to ERAP means
that France Télécom benefited, firstly, from an advanta-
geous interest rate owing to its status as an industrial and
commercial public establishment and, secondly, from the
express guarantee provided by the State for an amount of
EUR 10 billion (61). As a result, the measures at issue are
financed by state resources, even if the credit line has
ultimately not been used.

(80)

In its additional comments of 11 April 2003, Bouygues
Telecom maintains that, in view of the Company's financial
situation,
the recapitalisation operation carried out on
24 March 2003 was possible only because of the prior
intervention of the other aid measures. Consequently, the
recapitalisation constitutes per se state aid as it stems directly
from prior state aid (62).

(81) As

regards

the condition relating to the advantage,
Bouygues Telecom points out that the occurrence giving
rise to the guarantee took place subsequently to the
reduction in France Télécom's credit rating by the rating
agencies with a view to restoring the market's confidence.

to the financial markets. Thus,

(82) Again on this point, Bouygues Telecom states that the
guarantee had the effect of enabling France Télécom to gain
renewed access
the
guarantee improved the prospects attaching to France
Télécom's credit rating and enabled it to avoid junk-bond
classification. Bouygues Telecom observes next that the
stock-exchange price of France Télécom's shares improved
considerably. In addition, the spreads on the bond market

linked to the shareholder

(83) Bouygues Telecom states more precisely, in its comments of
11 April 2003, that the announcement and implementa-
tion of the state support gave rise to aid at the origin of
advantages
loan and the
recapitalisation. These advantages had the effect inter alia
of moving the liquidity wall further away, that is to say, of
increasing the amount of financing available for meeting
debt repayments and of permitting an actual and potential
postponement of payments and actual and potential cost
savings.

(84) Concluding on this point, Bouygues Telecom maintains that
the advantage gained by France Télécom amounts to more
than EUR 40 billion (EUR 3 billion in respect of all the
support measures taken by the French State on France
Télécom's behalf and EUR 36,7 billion in respect of the
State's participation in the Company's recapitalisation),
which amount takes no account of the considerable latitude
granted to France Télécom as a result of the removal of all
financial concerns, the liquidity wall being shifted by almost
EUR 43 billion.

(85)

In its additional comments of 7 January 2004, Bouygues
Telecom states that
the advantage enjoyed by France
Télécom as a result of the State's irrevocable commitment
of support may be estimated at more than EUR 30 billion,
while the advantage derived from the recapitalisation
operation may be put at more than EUR 50 billion.

(86) As to the prudent private investor test, Bouygues Telecom
argues that the support measures do not satisfy that test for
the following reasons:

a)

term.

In Bouygues Telecom's opinion,

Unconditional, unlimited commitment: Bouygues Tele-
com takes the view that
the State's declarations
constitute a firm and unconditional legal commitment
which an investor would never have undertaken
without entering the slightest reservation. It is there-
fore an unlimited guarantee granted to a company
which is extraordinarily leveraged and fragile in the
short
the
measure at issue does not fulfil the criteria mentioned
in the Commission Notice on the application of
Articles 87 and 88 of the EC Treaty to state aid in the
form of guarantees (63)(hereinafter called ‘the Notice
on state aid in the form of guarantees’) in so far as, in
particular, France Télécom was in financial difficulties
at the time the guarantee was granted and in so far as
the guarantee does not
to any specific
transaction and gives rise to no remuneration. France
Télécom has therefore secured advantages which it
would not have secured under normal market
conditions.

relate

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b)

c)

that

the shareholder loan:
Terms governing the granting of
Bouygues Telecom argues
the mechanism
adopted by the State meets by and large a concern
falling within the realm of public finances (compliance
with the Maastricht criteria, notably), and is not in
investor
keeping with the principle of a prudent
operating in a market economy. Repayment of the
loan subscribed by ERAP on behalf of the State with a
view to participating in the recapitalisation is not
assured. The method of repayment first and foremost
envisaged is linked to the sale of shares, the profit on
which is potential and cannot for that reason confer
on the investment in question the nature of a ‘prudent’
transaction. Bouygues Telecom points out that the
guarantee granted by the French State to ERAP to the
tune of EUR 10 billion enabled ERAP to gather
together the funds needed to grant the credit line on
advantageous terms,
i.e. at a rate of 3,375 %. Any
prudent private investor would have carried out such
a transaction at a higher cost for which he would have
demanded specific guarantees linked to the company's
assets.

Recapitalisation: In substance on the commitment by
the French authorities to recapitalise France Télécom
and the recapitalisation operation itself, Bouygues
Telecom claims that the prudent private investor test
is not satisfied in the present case as the State
undertook to participate in France Télécom's recapi-
talisation on 12 July 2002, i.e. prior to the existence
of the Ambition 2005 plan, without knowing France
situation, which had
Télécom's
become much worse, and without the concomitant
participation of private investors. In this connection,
Bouygues Telecom stresses the following points:

exact economic

that

— The company's financial situation: Bouygues Tele-
com stresses
the historical operator's
financial health at the time of the decision to
invest prevented it from resorting to private
investors without the State's support (EUR 70
billion of losses, EUR 8 billion of negative equity
and debt maturities amounting to EUR 50
billion over the following three years). Moreover,
the plan presented by Mr Bon at that time did
not appear relevant in the eyes of the market and
was followed by France Télécom's downgrading
situation was
by the rating agencies. This
reflected by the statement by Thierry Breton
before the Senate finance committee (64).

which a prudent private investor would have
been entitled to expect in such circumstances
cannot be reliably calculated. Thus, the recapi-
talisation of France Télécom cannot be com-
pared to any other financial transaction in view
of the scale of the liquidity crisis faced by the
Company. As a result, the State was unable to
assess its risk by making a probability calculation
and was confronted with a radical uncertainty
(that is to say, a non-probabilisable risk) when it
decided to guarantee France Télécom: thus, both
the level of
risk and the return were not
quantifiable. At all events, the investment could
not be characterised as reasonable. In particular,
a projection of France Télécom's stock-exchange
valuation and of
the return on investment
expected by a private investor shows that the
investment is unreasonable. In accordance with
the method used by the Commission to assess
the prudent nature of an investment, the return
on investment which a prudent investor would
have demanded, bearing in mind in particular
the risks connected with the transaction, may be
estimated at at least 30-40 %. This rate is the
minimum required by the Commission in the
Alitalia (65)
cases (66). According,
however,
to the methods used by Bouygues
Telecom, that is to say, EPS (Enterprise value or
Analysts target price 12 months), the return on
investment in the transaction at issue is only
16 %. Nor can the State count on a remuneration
in terms of dividends as France Télécom has
announced that it will not be distributing any.
Generally speaking, it is not appropriate to make
an ex post analysis of France Télécom's positive
results in the assessment of the prudent investor
test. A private investor would never have
committed himself financially without entering
the slightest reservation at a time when the total
amount of the France Télécom group's debts had
not been established. Bouygues Telecom adds in
this regard that, in accordance with the case law
the European
of
Communities, it cannot be maintained that the
commitments entered into by the State towards
France Télécom are a reflection of the conduct of
a prudent investor solely on the ground that
France Télécom had become a profitable com-
pany.

the Court of

and Iberia

Justice of

transaction: Bouygues Telecom
— Return on the
indicates that
the period for calculating the
return on the investment begins at the earliest on
12 July 2002, the date of the first declaration by
the State having the effect of binding it legally
vis-à-vis France Télécom and its creditors, and
ends at the latest on 4 and 5 December 2002,
the dates on which the Ambition 2005 plan was
made public and the EUR 9 billion credit line
was opened. It argues that the reasonable return

— Difference between the situation of a private investor
and that of the State: Bouygues Telecom argues
that, in view of the prolonged crisis in the world
economy and more particularly in a telecommu-
nications
sector undergoing transition, and
bearing in mind the size of the sum in question,
no private investor could have envisaged a
capital increase of that amount without condi-
tions and only a State of the creditworthiness of
France could have coped with such uncertainty.

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the financing of

the
It thus points out that
strengthening of
the Company's capital base,
covered entirely by debt without any own funds,
would have affected the credit rating of any
private investor who behaved in a similar way,
whereas a State, on the other hand, can be
punished only by its electors, who do not have
the same objectives. The creditors and share-
holders of the private investor would have asked
for the investment to be backed by a business
plan containing precise commitments, including
the disposal of assets. Bouygues Telecom con-
cludes that, at all events, a prudent investor
whose financial capacity was comparable to that
the French State and who issued such a
of
guarantee would not have inspired much con-
fidence in the markets and that it is clear that it
was due to the qualification of ‘sovereign debt’
enjoyed by the State's commitments that con-
fidence was restored.

— Concomitance criterion: Bouygues Telecom argues
that the concomitance principle has not been
complied with. The French authorities' decision
to invest dates from 12 July 2002 and France
Télécom's financial difficulties on that date by
themselves point to the recapitalisation being
state aid, all the more so as the State took its
investment decision in ignorance of the Compa-
ny's exact economic and financial situation and
prior to the drawing-up of the financing plan.
Bouygues Telecom points out that the participa-
tion of private investors was neither certain nor
significant at the time of the announcement by
the Government of its participation in the capital
increase, even if the analysis of the date of taking
of the decision to invest is brought forward to 5
December. According to the case law of the
Justice, where private investors are
Court of
prepared to intervene only after the authorities
have decided to grant aid, the fact that those
investors are then prepared to intervene at the
same time is no longer
relevant. Such an
intervention is the consequence of the support
given by the State and not the result of a decision
of a private investor. Hence, in the present case,
the fact that a banking syndicate undertook to
underwrite the transaction cannot be taken as a
basis for concluding that
the concomitance
principle is complied with. The French autho-
rities' decision to invest is firm and uncondi-
tional whereas that of the private investors is
not, and the private investors made their
contribution only after having received, on a
number of occasions and with certainty, the
assurance that the State would also participate in
the transaction and especially that it would take
every step to ensure that France Télécom did not
have any financing problems. At all events,

the view that,

in
Bouygues Telecom takes
accordance with the case law relating to the
Seleco decision referred to in paragraph 80, a
significant participation by private investors is
not in itself sufficient to rule out any aid element.
It maintains, moreover, that the State's invest-
ment is higher than the amount of its participa-
tion in France Télécom's capital. It argues, lastly,
that the very high level of banking commissions
allows the bank to subscribe to the underwritten
shares at a lower discount than that offered to
the public.

the debt

(87) As regards the effect on competition, Bouygues Telecom
points out inter alia that the measures at issue have had the
effect of affecting competition in the market for mobile
telecommunications. In substance, it refers to the fact that
the scale of France Télécom's debt can be traced back to the
development of the mobile telecommunications business.
linked to its
Thus, Orange does not bear
acquisitions;
instead, the parent company bears it in its
entirety. Being endowed with the means of coping with its
debt
thanks to the measures at issue, France Télécom
enables Orange to consolidate and develop its position in
the mobile telecommunications markets. With a 49,8 %
market share, Orange is in a dominant position in the
French mobile telephony market.
In its comments of
11 April 2003, Bouygues Telecom points out that the
structure of
in
France is due to a capitalistic investment strategy (together
with an aggressive commercial strategy) carried on by
Orange to the detriment of its operational profitability,
thanks to the support granted to it by the State through
France Télécom, notably via the aid at issue in the present
case. It stresses, moreover, that the measures at issue affect
competition throughout the telecommunications market
and dissuade foreign operators from coming to propose
their services in France. France is thus the only European
country in which no ‘foreign’ mobile operator has been able
to establish itself.

the mobile telecommunications market

(88) As to the compatibility of the support measures within the
meaning of the Guidelines, Bouygues Telecom argues that
they do not possess the exceptional character required in
order to be characterised as rescue aid within the meaning
of the Guidelines. Basically, the fact is that the Ambition
2005 plan does not satisfy the minimum requirements of
the Guidelines. The plan contains measures not forming
part of a rescue operation, such as recourse to the bond
market or the envisaged recapitalisation. Among other
things, the amount of the recapitalisation is more than is
needed to cover France Télécom's short-term operating
needs alone, excluding reimbursement of the loans taken
out at the time of its expansion. Moreover, the plan is not a
restructuring plan capable of modifying the structure of
France Télécom with a view to improving its profitability,
but is limited to increasing the Company's liquidity so as to
its current difficulties. Bouygues
lessen the impact of
Telecom insists also on the fact that the measures at issue

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are weak in comparison with those taken by the historical
operator's competitors, such as KPN, Deutsche Telekom or
British Telecom, both as regards the disposal of assets and
as regards the social measures taken.

(93) Bouygues Telecom furnishes, lastly, a study of whether such
declarations emanating from the British Government would
have a binding character under English law. The conclusion
of that study is that such declarations would be binding or
would impose on the State the burden of
justifying a
change of position.

(89) The restructuring plan does not contain any substantial
compensatory measures capable of preventing any undue
distortions of competition so as to offset the aid granted by
the State. Bouygues Telecom notes among other things the
lack of any disposal of valuable or strategic assets. Thus, the
sales envisaged by France Télécom are limited to non-
strategic assets worth very little (EUR 3,5 billion, according
to France Télécom's own estimates).

(90) Additionally, Bouygues Telecom maintains that compensa-
tory measures must be adopted for the benefit of the
historical operator's competitors in the mobile telecommu-
nications market, and in particular for the benefit of the last
entrant, the presence of whom is a precondition for the
existence of genuine competition in the French market. It
proposes inter alia as compensatory measures within the
meaning of
the Guidelines a five-year ban on Orange
proposing lower rates than its competitors for equivalent
services, and the imposition of a self-limitation on Orange's
monthly market shares to 33 % until such time as Orange's
net market share is reduced to 40 %. It also proposes a
limitation of the length of the commitments entered into
by consumers vis-à-vis Orange to 12 months (acquisition
and renewal), a freezing of the deployment of Orange's
GSM and GPRS network so as to re-establish a competitive
balance, the obligation to dispose of strategic assets and the
obligation to limit marketing activities.

(91)

In its comments of 26 May 2004, Bouygues Telecom
furnishes inter alia an economic analysis which states that,
in view of the specific attitude of States (variable according
to their own credibility), the support of the State has a
substantially different scope from that of a majority
state
shareholder. The analysis also points out
that
intervention is part of a long tradition and that
that
intervention is judged on the basis of an already established
reputation. In Bouygues Telecom's view, it is clear that, by
supporting France Télécom,
staking its
reputation and hence is placing on the line its ability to
intervene again in favour of other French companies. The
analysis also stresses that the question of the French State's
credibility is to be seen in the context of the specific French
situation with regard to privatisation. Any flagging in its
support would have deprived the State of its capacity to act
subsequently, which was speedily done in the case of
Alstom.

the State is

(92) Bouygues Telecom also furnishes an analysis of whether the
State's declarations had any binding effect under the law of
the state of New York, where the Company is also quoted.
According to that analysis,
such
declarations would be considered binding either as a
unilateral contract or by virtue of the principle of estoppel.

is probable that

it

4.6.

Comments from Cable & Wireless

(94) Cable & Wireless expresses the view that the measures at
issue constitute state aid. The market's confidence following
the announcement of the granting by the French authorities
of the shareholder loan sufficed to confer an advantage on
France Télécom. In so far as a prudent private investor
would not have taken the decision to recapitalise a
company such as France Télécom, which was clearly
inefficient prior to the adoption of the 2005 Ambition
Plan, the Company enjoyed an advantage which it would
not have secured under normal market conditions. Cable &
Wireless also points to the dangerous precedent that would
be created by allowing a government to underwrite all the
financial problems of public undertakings and to the
negative dynamic that would be created for competition. It
adds that the measures cannot be considered compatible
within the meaning of the Guidelines. Inasmuch as the
Company is not in financial difficulties, the Guidelines are
not applicable.

4.7.

Comments from AFORS Télécom

(95) AFORS Télécom (Association française des Opérateurs de
Réseaux et Services de Télécommunications) observes that
the measures at issue constitute state aid. More particularly,
it states as follows:

(96) Through a series of step-by-step decisions taken in the
course of 2002 — including the State opting for payment
of the 2002 dividends in shares and not in cash — until the
opening of a EUR 9 billion credit line made available to
France Télécom via ERAP, the French authorities restored
investors' confidence by giving formal status to their
support. Moreover, even if the credit line opened by ERAP
were never used by France Télécom,
it symbolises the
guarantee of state support and hence mobilises state
resources within the meaning of Article 87(1) of the Treaty.

(97) The terms on which the credit line was granted and the
terms governing its remuneration do not satisfy the tests of
the prudent private investor principle. AFORS Télécom
argues that France Télécom's financial failings since 2000
could not have happened in the presence of a prudent
investor. The State thus did not perform its role of
‘watchdog’ and it allowed France Télécom to increase its
indebtedness on an unheard-of scale. AFORS Télécom
observes that France Télécom's past acquisitions strategy

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risks
was conducted without
inasmuch as the State in its capacity as shareholder assured
France Télécom of its support against any prospect of
bankruptcy.

regard to the inherent

4.8.

Comments from Cégétel

(98) The State's support has had the effect of preventing any
further downgrading of France Télécom's credit rating by
the rating agencies, which has made it possible to speed up
France Télécom's return to the market and the refinancing
of its debt under less onerous financial conditions. France
Télécom has enjoyed an advantage which AFORS Télécom
estimates is worth EUR 1,5 billion (67). Hence,
it is the
credibility of the French State, enjoying as it does excellent
creditworthiness, and not that of the restructuring plan,
that determined the conditions of France Télécom's return
to the financial markets. Moreover, the State's support had
the advantage that France Télécom no longer had to modify
its strategic perimeter.

(99) The Ambition 2005 plan consists of guidelines and not of
clearly worded, binding and irreversible commitments and
cannot be compared to the restructuring process imple-
mented in Europe by, say, British Telecom.

(100) The advantages enjoyed by France Télécom prolong
distortions of competition damaging to the members of
AFORS Télécom. In AFORS Télécom's opinion, the aid
granted by the French State reinforces the already existing
anticompetitive practices which are highly detrimental to
alternative operators. AFORS Télécom mentions among
other things the exclusive utilisation of France Télécom's
distribution network by Orange and Wanadoo,
the
unbundling offers which systematically benefit Wanadoo
and France Télécom, and the monopoly position held by
France Télécom in the market for shared-revenue services
(the supplying to consumers of value-added content
accessible by telephone). AFORS Télécom points to the
real risk of prolongation of this conduct which the state aid
would allow.

(101) Compensatory measures should be imposed on France
Télécom with a view, firstly, to ensuring that the conduct of
the State is analogous to that of a company which has to
restore its
financial capacity without benefiting from
exceptional aid and, secondly, to restoring fair competition.
This would involve (i) restricting France Télécom's invest-
ment to that of an indebted company, e.g. by limiting its
investment policy to investments the return on
overall
investment period of which is less than 12 months in the
case of
introducing transparent
(ii)
structures between each business within the group; and
(iii) preventing the state aid from being used to fuel a price
war, for example through the systematic publication of its
tailor-made retail offerings.

activities;

retail

(102) Cégétel maintains that there are two separate measures: (i)
the announcement by the French authorities of
the
granting of a shareholder loan to France Télécom; and (ii)
the participation by the State in the recapitalisation of
France Télécom.

(103) As regards the first measure, Cégétel remarks first of all that
the situation of a company with a private reference
shareholder and that of a company with a public majority
shareholder are not comparable. A similar announcement
made by a private shareholder would have been received
with the greatest circumspection by the rating agencies and
would have caused them to take a close look at
the
arrangements for the refinancing by the shareholder in
question of the credit line thus extended. Cégétel concludes
from this that the mere fact of being backed by the State
confers a considerable advantage vis-à-vis investors and
prevented any further downgrading of France Télécom's
credit rating by the rating agencies despite the fact that the
operator appeared to be in an insoluble situation.
It
maintains that the Commission may justifiably consider
that the French State granted aid to France Télécom even
before an agreement for the granting of a EUR 9 billion
credit line was signed as the announcement of support was
sufficient to render this emergency financing unnecessary.
Lenders were thus certain that France Télécom could never
default on its payments inasmuch as the State would always
be ready to grant it the funds it needed to honour its
commitments, and this enabled France Télécom to obtain
financing directly on the market. Cégétel concludes on this
point that the government declarations were worded in
such a way that the markets would be certain that lending
money to France Télécom would be strictly equivalent to
lending money directly to the State. France Télécom thus
enjoyed advantages which it would not have secured under
normal market conditions, compared, for example, with
the situation of Vivendi Universal. The recourse to the bond
market enabled it to avoid having to resort exclusively to
financial institutions in order to cope with its liquidity crisis
and suffering all the constraints linked to that type of
financing. Cégétel maintains that the terms of grant of the
credit line by the French authorities are not in keeping with
those granted by a prudent investor in relation to one of his
participations. More particularly, a prudent investor would
never have agreed to the policy of financing acquisitions
through debt which placed France Télécom in a critical
financial situation such that the State had to carry out a
recapitalisation. Cégétel refers to the Crédit Lyonnais II
the aid
in which the Commission finds that
decision,
measures could not be justified by the failings over many
years of the State as shareholder (68). In Cégétel's opinion,
opting to channel the aid through ERAP is not what a
prudent investor would have done. In this connection,
Cégétel notes in particular the interest rate applicable to the
drawings on the loan and the absence of securities and

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guarantees. Regarding quantification of the aid relating to
the shareholder loan, Cégétel maintains that point 3.2,
fourth subparagraph, of the Notice on state aid in the form
of guarantees is applicable and that, in view of the fact that,
thanks to state support, France Télécom has been able to
borrow EUR 16 billion to meet its maturities despite the
catastrophic nature of its finances, the amount of the aid is
equivalent to the amount raised thanks to the announce-
ment.

4.9.

Comments from LDCOM (71)

(107) LDCOM identifies a dual mechanism of aid in support of
for staff mobility,
France Télécom, backed by support
namely: (i) the provision of an unlimited guarantee; and (ii)
the granting of a EUR 9 billion credit line.

(104) Cégétel maintains that the same reasoning applies to the
recapitalisation, which it analyses, from an economic point
of view, as being the transfer of EUR 9,2 billion of France
Télécom's debt to ERAP, which benefits from the State's
guarantee. Cégétel counts the whole of this amount as aid.
It also highlights the amount of the aid corresponding to
the redundancy costs which a company would have had to
bear in terms of staff cuts, namely EUR 1,5 billion, and
which the historical operator would not bear owing to its
employees being transferred to civil service jobs under the
Ambition 2005 plan.

(105) Cégétel maintains that France Télécom benefits from a
formal guarantee in so far as the Court of Cassation
considers that private-law companies enjoying special legal
status are not subject to the applicable judicial liquidation
procedures (cf., for example, SEITA or Air France). Thus, by
virtue of this case law, France Télécom must be regarded as
not falling within the ambit of the ordinary-law arrange-
ments. Cégétel acknowledges that France Télécom has not
enjoyed EPIC status since 1996, but points out that,
in
reality, the guarantee has not disappeared inasmuch as the
repeated
state authorities have sought,
declarations, to convince the markets that France Télécom
would retain, come what may, the support of its reference
shareholder and that, if necessary, the State would help the
operator to meet its maturities (69).

through their

(106) Cégétel maintains,

lastly,

the financial

the measures cannot be
that
considered compatible within the meaning of the Guide-
lines. It recalls that, according to the Guidelines, where a
State injects capital into a firm in difficulty,
‘it must be
deemed likely that
transfers involve state
aid’ (70). It argues that the compensatory measures taken by
France Télécom cannot be considered sufficient within the
meaning of the Guidelines. Thus, the Ambition 2005 plan
does not contain any specific provisions on asset disposals
or a social plan. Cégétel proposes inter alia the following
compensatory measures in the fixed telecommunications
market: (i) the sale of
loop access and associated
increased ring-fencing between France
services; and (ii)
Télécom and the companies Orange and Wanadoo.

local

(108) Provision of

the unlimited guarantee: LDCOM bases its
considerations on the content of the declarations by the
French authorities which have appeared since 20 June 2002
in the press via press releases of the Ministry of Economic
Affairs and Finance addressed directly or indirectly to the
rating agencies. These declarations, which seek to reassure
the financial markets about France Télécom's situation (72),
have contributed directly to the improvement in France
Télécom's credit rating in the markets and have helped the
Company to face up to the liquidity wall with which it was
confronted. According to LDCOM, the State's intervention
by may be characterised from a legal standpoint in a
number of ways. It points out that, under French law, no
form is required for the creation of a legal obligation and
that an oral declaration may therefore, under certain
conditions, constitute a legal act giving rise to a right on the
part of its addressee. The binding force of the unilateral act
is based on the theory of commitment by unilateral will,
which is one of the sources of the law of obligations. This
obligation arises from the dual condition of the firm and
precise nature of the will. LDCOM also affirms that the
State's responsibility is based,
in company law, on the
analysis of the theory of the apparent mandate and of the
de facto manager — in the latter instance for having directly
contacted the rating agencies. Under international law, the
State's contractual responsibility is also incurred in so far as
a unilateral
legal act has binding force where it can be
shown that the declaration was expressed publicly with the
intention of binding its author (73). Thus, a mere oral and
public declaration made by a State may create a legal
obligation on its part. In the present case, according to
LDCOM, the content of the declarations binds the French
authorities as the letter of the declarations constitutes a
clear and unequivocal unilateral commitment by the State
to be the lender of last resort to France Télécom and not to
leave the latter in the financial crisis it has known since the
summer of 2002. Inasmuch as the State's commitment is of
a binding nature, any failure to honour that commitment
responsibility (third
may incur
parties could have forced the State to carry out
its
commitment).

the State's contractual

(109) LDCOM asserts that the State's tortious liability was also
incurred, notably under company law. Thus, a company
which gives the impression of taking over the debts of
another company gives rise to a claim on itself by third
parties. According to LDCOM, the State, by its declarations,
guaranteed third parties that it would take over France
Télécom's maturing debt. More precisely, LDCOM main-
tains that the State's declarations to the effect that it ‘will
contribute to the very substantial strengthening of the
company's capital base (74)’ give rise to an obligation on its
incurring its legal and financial responsibility (75).
part
According to learned opinion: ‘if the State did not respect
the commitment thus entered into, its responsibility would

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incontestably be incurred before the administrative courts,
the forum for hearing cases involving promises not kept by
the State’ (76). LDCOM states that Article L465-1, third
subparagraph, of the Monetary and Financial Code provides
for the punishment of persons who distort the normal
functioning of markets by illicit actions which influence the
trend of stock prices. Consequently, according to LDCOM,
it is clearly established that the State did not at all intend to
announce hypothetical
future events but was in fact
announcing its future line of conduct.

(110) In LDCOM's opinion, Community case law also confirms
that any press article, emanating either from the company
from the Government, which is of an
concerned or
unconditional nature necessarily indicates
state
resources are being made available (77). In the present case,
the declarations emanate directly from the Government and
are of an unconditional nature.

that

(111) It follows from the above that the legally and financially
binding declarations of support made by the French
authorities on and after 2 June 2002 are akin to a
guarantee the purpose of which is to enable France Télécom
to avoid bankruptcy and to survive within its existing
business perimeter. In LDCOM's opinion, the guarantee is
an unlimited one. LDCOM states that it is therefore not
only the provision of a credit line and the amount thus
granted but the very announcement of that provision which
constitutes the aid. In accordance with the Notice on state
aid in the form of guarantees, the criterion relating to state
resources is fulfilled, whether or not the guarantee is called.
Considering that the measures at issue did not satisfy the
criteria of the said Notice, on the grounds that France
Télécom could not then find the necessary funds on the
markets, LDCOM observes that the measures constitute aid.
LDCOM also argues that ‘in view of the amounts involved,
the State alone was capable of providing such a guarantee,
no prudent investor being able to ensure the credibility vis-
à-vis the markets of
the “taking in hand” of France
Télécom’ (78). Lastly, LDCOM stresses that any analysis to
the contrary would be fraught with consequences inasmuch
as not only would it run counter to the principles of
domestic positive law but
it would also open up the
possibility for Member States to sustain with impunity the
share price of companies in which they have an interest (79).

(112) The effect of this unlimited guarantee is clearly felt in the
market and the market's reaction corresponds to the value
investors actually place on the guarantee. Thus, the stock
exchange price of France Télécom's shares rose as from July
2002,
leading to an increase in the operator's stock
exchange value. LDCOM argues that the increase in value
thus brought about by the State's announcement may be
put at EUR 5,9 billion. Similarly, France Télécom's
spreads (80) started to improve as from July 2002, thereby
reducing the operator's financial burden and permitting the

rebuilding of its financial capacity. These spreads make it
possible to evaluate in concrete terms the financial weight
of
the State's announcement. They must be related to
France Télécom's entire debt financed through bond issues.
Depending on the circumstances, they vary from 2 % to
3 %, equal to an annual saving of between EUR 1,37 billion
and EUR 2,05 billion. Assuming that France Télécom will
maintain a constant level of indebtedness and hence that
the debt will be financed indefinitely, LDCOM evaluates the
impact of the saving thus made at between EUR 19,57
billion and EUR 29,36 billion. Moreover, the State's support
has enabled France Télécom to refinance itself on the bond
markets on more advantageous terms than it would have
obtained beforehand.

(113) Announcement of the making available of a EUR 9 billion credit
line: LDCOM does not analyse this measure in the light of
Article 87(1) of the Treaty, but refers to the analysis carried
out by the Commission in its opening decision, insisting on
the part played by ERAP.

(114) In LDCOM's opinion, both from the point of view of its
amount and of that of its modalities or its very objective,
the State's support is not covered by the prudent investor
criterion. Thus, no prudent investor would, in September
2002 (when the State announced that
it would be
supporting France Télécom financially), have advanced
EUR 9 billion under such economic circumstances without
basing itself on a restructuring plan. LDCOM explains,
moreover, that no private investor would have had the
financial capacity to mobilise such amounts in such a short
space of time. It also states that, for a private investor,
maintaining the integrity of a group's operational structure
is a means to the end of earning a return on his investment.
In the present case, for the French authorities it is an end in
itself. It is understandable that the State should bear social
and political considerations in mind, but such a move
would violate the principle of equality between public and
private sectors.

(115) In LDCOM's opinion, the State's position that a prudent
majority investor would not have called into question
France Télécom's functional integrity does not stand up to
an analysis of the conduct of such an investor under the
market conditions prevailing in June-July 2002. Thus,
investors who invest an extremely large proportion of their
assets in a company threatened with collapse will be the
its
first to demand a radical and immediate review of
strategy, involving, if necessary, a huge sell-off of strategic
assets. The relevance of this analysis can be verified by
comparing the situation in which France Télécom would
have found itself without the State's support with that of
Vivendi Universal, which was obliged, under pressure from
the markets, to revise its range of assets. LDCOM thus

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maintains that the Commission must not only refuse to
take as point of departure the maintenance of the group's
functional integrity, but also analyse the impact of such
maintenance as being the veritable effect on competition. It
argues that, in July 2002, without any state intervention,
France Télécom would have had no choice but to reduce its
range of assets, enforce redundancies (81) and revise its
strategic objectives.

with which was punishable under international law. It also
states that the prohibition on a person denying a fact to the
detriment of another person (estoppel) is a general principle
of international commercial law which is binding on the
State. It points out in this connection that the principle's
applicability in the present case is incontestable in view of
the fact that the French State is acting as a shareholder and
hence also as an operator in international trade.

(116) LDCOM puts the total amount of aid at EUR 15 billion, this
being the sum which France Télécom succeeded in raising
on the financial markets thanks to the aid granted to it by
the State. The aid amount cannot therefore be limited to the
EUR 9 billion provided directly by the State, since it was
through various
(unlimited guarantee,
shareholder loan, staff movements) that France Télécom
was able to increase its capital by such an amount.

state measures

(117) In LDCOM's opinion,

itself

the aid granted by the State
constitutes restructuring aid. LDCOM has carried out a
comparison between the situation before and after the
public intervention in the markets for voice telephony,
high-speed Internet access and low-speed Internet access,
and that which would have obtained in the absence of any
public intervention. This comparison confirms that the aid
has had the effect of maintaining the status quo ante in the
run-up to 2005 (intact operational
and marketing
capacities), which makes it possible by deduction to
quantify in terms of market shares some of the effects of
the public intervention. LDCOM proposes that remedies
should be imposed on France Télécom under point 35 of
the Guidelines, the effect of which will have to be to restore
the market situation to what it would have been had France
Télécom been forced to modify its business perimeter
spontaneously. In so far as the State has, in LDCOM's view,
set
the primary objective of maintaining France
Télécom as an integrated telecommunications operator, the
main markets affected are that for mobile telephony and
that for fixed telephony, both upstream (interconnection,
DSL access) and downstream (retailing of communications,
DSL Internet access, etc.). LDCOM proposes therefore that
the Commission should take behavioural measures to limit
the distortion of competition thus brought about and to
enable alternative operators to work under the conditions
which they would have enjoyed in the absence of aid. It
proposes, therefore, a reduction in the market shares of
France Télécom and its subsidiaries in the high-speed
Internet market (maximum of 42 % of the market for the
sale of high-speed Internet access by DSL, in terms of value)
and in the voice telecommunications market (maximum of
55 % of
the local and national voice communications
market, in terms of value) and a series of measures aimed at
implementing the limitation in France Télécom's market
shares (82). The second category of measures proposed by
LDCOM consists of the imposition of measures aimed at
enabling the development of competitors (83).

(118) In its comments of 17 May 2004, LDCOM states that the
declarations by the Minister for Economic Affairs and
Finance constituted a unilateral state act non-compliance

its

that

the fact

the credibility of

rating (LDCOM refers

(119) LDCOM also stresses that the State cannot go back on its
declarations without harming its own financial credibility.
In its intervention on the market, the State plays a role of
borrower and a role of majority shareholder in a number of
companies. This dual role leads to a dual credit rating by the
rating agencies,
in its capacity as borrower and in its
capacity as shareholder through the ratings given to public
undertakings. This twofold intervention possibility calls for
particular vigilance as any deficiency established in either of
these two roles is likely to have consequences for its other
role and for
to Moody's
assessment of public undertakings). LDCOM further
the State is
stresses
fundamentally different from that of other enterprises in
a similar situation which cannot reassure the market (as in
the case of Vivendi Universal). The security which, for the
financial markets, French public borrowings represent is
therefore the justification for the unconditional confidence
placed by investors in the State's declarations, the State
having always respected its commitments. The taking into
account of the support given by the State following its
entering into direct contact with the rating agencies, the
role of which is be extremely critical as regards the risk
inherent in a financial investment, highlights the credibility
of the State's support for France Télécom. LDCOM also
points out that the State's rating attains the top mark of Aaa
as it honours its commitments. A disengagement by the
State would lead to a fall in its rating, which would result in
a re-evaluation of public debt
interest. Likewise, a
disengagement from one public undertaking might have
an impact on the credit rating of all the others.

4.10.

Comments from B

(120) In B's opinion, the making available of funds, coupled with
the public commitment by the State to support France
Télécom,
is comparable to the providing of a financial
guarantee capable of reassuring not only the Company's
creditors but also the entire market, which has helped to
improve France Télécom's situation vis-à-vis the stock
markets. Hence, B concludes, the measure at issue has been
granted through state resources. Given that the State's
conduct cannot be considered to be that of a private
investor in a market economy, the Company enjoyed an
advantage which it would not have obtained under normal
market conditions. Thus, at the time of opening of the
credit line, France Télécom's financial situation was such
that no prudent
investor would have carried out a
transaction of this type. Likewise, B maintains that the
concomitance principle has not been complied with, the

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participation of private investors having been made
possible only by the announcement and making available
of a shareholder loan the amount of which was so huge
that no private investor would have been able to mobilise
so much money. It points out that the support measures
reassured private investors that any risk of France Télécom's
becoming bankrupt could be ruled out. It also argues that
the amount of France Télécom's recapitalisation (between
80 and 100 % of its stock exchange valuation) is such that,
in the light of France Télécom's economic situation, no
private investor would have carried out such a transaction
were it not
the declarations of support and the
prefinancing measures taken by the Government.

for

(121) B maintains that

the measures cannot be considered
compatible within the meaning of the Guidelines. In the
alternative, it proposes compensatory measures, inter alia in
the market for fixed telephony, in the market for Internet
access and in the market for mobile telephony. It points to
the various effects on the development of competition in
the French market (84). In the fixed telephony market, it
advocates, among other things, accounting separation and
the creation of a genuine management system for France
Télécom's network activities so as to prevent the pursuit of
anticompetitive practices. It also proposes the imposition
on France Télécom of an obligation to inform fixed
telephony subscribers about the possibility for them to
choose their operator for the routing of their telephone
calls so as to attenuate the ‘tremendous “competitive
leverage” afforded it by its virtual monopoly in the market
for access to the telephone network and in the markets for
the routing of telephone communications’. In the mobile
telephony market, B proposes inter alia the imposition on
Orange of an obligation to make a MVNO (Mobile Virtual
Network Operator) offer to operators wishing to penetrate
this market.

4.11.

Comments from Tiscalinet

by which the State would hold France Télécom's capital
strengthen the analysis of the irrevocable character of the
state guarantee on which market operators, and in
particular bond holders, relied when subscribing to the
successive calls made by France Télécom. These factors bear
out that the State is acting as a ‘last resort’ vis-à-vis France
Télécom, a transaction to which a prudent investor would
not have subscribed. In Tiscalinet's opinion, only the French
State was capable of mobilising such resources.

(123) Tiscalinet maintains that the guarantee given by the State
and the subscription to the capital
increase which no
prudent private investor would have made enabled France
Télécom to avoid having to carry out huge asset disposals
with the sole aim of maintaining its business perimeter and
of benefiting from relatively low bond rates compared with
its intrinsic financial situation.

the

that

(124) The aid is incompatible with the Guidelines. Tiscalinet
the granting of
for
conditions
maintains
restructuring aid are not met,
inter alia because the
Ambition 2005 plan does not contain sufficient compen-
satory measures to safeguard competition. It refers to the
distortions of competition brought about by the French
State's support in the case of the high-speed Internet access
market. It maintains that France Télécom is able to invest
heavily in certain aspects of the network, using advertising
monies, which benefits Wanadoo. Moreover, Wanadoo has
not had to dispose of major assets and continues to benefit
from Yellow Pages income and from France Télécom's
commercial agency network. Tiscalinet also points out that
the strategy introduced by France Télécom, notably as
regards the launch of the simplified mixed public purchase
shares of
and exchange offer concerning Wanadoo's
11 March 2004, had the effect of enabling France Télécom
to benefit from fiscal aid which it would not have received
without
support measures. Tiscali draws
attention, moreover, in its letter of 5 April 2004 to the
anticompetitive strategy introduced in the DSL market in
France thanks to the initial aid from the French State.

the State's

(122) Tiscalinet argues that the declarations made by the State as
from 2 July 2002 signal to the market that any compulsory
administration of France Télécom is ruled out. At the same
time, the State's option for its 2002 dividends to be paid in
shares and not in cash is another signal by the State to the
market that it supports France Télécom even though a
prudent investor would have opted for payment of the
dividends in cash. Tiscalinet adds that the approaches made
by the Minister for Economic Affairs and Finance to the
Caisse des Dépôts et Consignations, which holds 5 % of the
historical operator's capital,
to block the
securities to make them less volatile and strengthen
investor confidence raises the question as to what private
investor would have acted in that way. Tiscalinet also
stresses that
legislative measures aimed at
extending ERAP's company objects so as to enable it to
hold France Télécom shares (85), the provision of a state
in France
guarantee to ERAP to enable it
Télécom (86) and the instrument dealing with the method

to induce it

the set of

to invest

(125) In the alternative, if the aid were to be found compatible
with the Guidelines, Tiscalinet proposes compensatory
measures essentially in the high-speed Internet access
market, such as the setting of a minimum price for France
Télécom's ADSL retail offerings to its subsidiaries, a ban on
making joint offers of France Télécom's and Wanadoo's
services, a ban on distributing Wanadoo's services in France
Télécom's commercial agencies, and the disposal of the
Yellow Pages business and of Wanadoo's foreign subsidi-
aries.

4.12.

Comments from D

(126) D has submitted a document entitled ‘Stage report on the
fulfilment of President Jacques Chirac's campaign commit-
ments in the fields of industry, energy, telecommunications

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and posts of June 2003’. On the subject of France Télécom,
the document states that:
‘Thanks to the State's resolute
support and to the appointment of Thierry Breton, France
Télécom has been more than just saved from a life-
threatening situation.’

4.13.

Comments from France Télécom

report, there is no transfer of state resources because, in the
end, there was no opening of a credit line or provision of a
guarantee, which would have required authorisation by a
finance act. There is likewise no transfer of state resources
because, under French law, no oral declaration by a public
authority is capable of having any effect whatever on the
public finances and of carrying out the slightest transfer of
state resources. And in the present case, all that is involved
is mere ministerial declarations having no negative impact
on the public finances.

(127) France Télécom has presented its comments in the form of
three reports: (i) a report drawn up by Mr Ehlermann dated
12 January 2004 entitled ‘Opinion for the attention of
France Télécom’; (ii) a report drawn up by Mr Galmot dated
6 January 2004 entitled ‘Does the case law of the Court of
Justice of the Communities allow the conclusion to be
drawn that the “financial measures introduced by the State
in support of France Télécom”,
regarding which the
Commission has initiated the procedure provided for in
Article 88(2) of the Treaty, have effected a “transfer of state
resources” for the benefit of that company?’; and (iii) a
report by HSBC entitled:
‘HSBC Opinion of 6 January
2004’. These three reports are described briefly below.

(128) The first report analyses the French authorities' conduct in
the light of the rules applicable to state aid in general and of
the prudent investor test in particular. The arguments set
out in the report, which seeks to show that the declaration
of 5 December 2002 concerning the shareholder loan does
not affect the State's resources, are essentially as follows: (i)
the December 2002 announcement of the shareholder loan
is not an irrevocable commitment (but a mere declaration
of intent), and is conditional. The announcement does not
therefore constitute a guarantee, and even less so an
unlimited guarantee; (ii) the Crédit Foncier de France decision
(referred to above) is not a valid precedent and, moreover, it
concerns a declaration that
is not comparable to the
December 2002 announcement. The report also seeks to
show that France Télécom was not a company in financial
difficulties within the meaning of the Guidelines at the time
the State decided to take part in the recapitalisation and
announced its readiness to provide a shareholder loan. It
stresses that
for the majority
is normal and usual
shareholder to grant a loan upfront of its participation in
the recapitalisation.

it

(129) The second report focuses on whether the mere announce-
ment of the making available of a shareholder loan in the
form of a credit line can as such constitute a commitment
of state resources. The report states that, according to the
Commission's argument, an irrevocable announcement of a
commitment to grant a loan, coupled with its apparent
provision, is sufficient to establish a commitment of state
resources, which corresponds to the concept of measure
having an effect equivalent to state aid, which has already
been rejected by the Court of Justice. According to the

(130) The third report focuses on the economic rationale behind
the State's conduct between 4 September 2002 (the
announcement of the first six months' results) and 15 April
2003 (the carrying out of the capital increase). The report is
based on an analysis of France Télécom's situation in
September 2002 and draws a distinction between, on the
one hand, France Télécom's operational performance
(healthy activities with a potential
improving the
operational cash flow) and, on the other, the amount of the
operator's debt
indebtedness, debt maturities,
negative consolidated own capital resulting from losses
linked to non-recurring items). The report concludes on
this point that the time lag between the generation of the
group's cash flow and the heavy short-term financial
commitments (2003-2005) poses a problem of refinancing
but not of solvency.

(level of

for

(131) HSBC also describes the background to the short-term
liquidity crisis, worsened as it was by a crisis of confidence
on the part of the market vis-à-vis the group. It states that,
in a situation such as that, reason demanded that urgent
steps be taken and required the introduction of a plan to
improve the operational results, an increase in capital, a
rescheduling of debt and a targeted policy of disposing of
assets. It argues that,
in the present case, the Ambition
2005 plan is a complete and rational coherent plan as it
permits among other things the generation of a EUR 15
billion cash flow via an operational improvement and a
disposal of assets that does not involve any amputation of
core businesses. It stresses that a capital increase in support
of a company introducing an operational recovery plan is a
natural way of rebalancing the accounts. It points out that
the oral support of a majority shareholder is also usual and
rational and that
reference
shareholders to announce their decision before other
shareholders do. It also points out that in this case the
shareholder loan was a low-risk, profitable and normal
transaction — pending a capital
increase — aimed at
safeguarding the majority shareholder's financial interests at
a time (the month of December) when it was not possible
to recapitalise the company for reasons of scheduling. It
adds that the loan was to be made on market conditions.

is normal practice for

it

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(132) The HSBC report mentions also the trend in the price of
France Télécom shares on the stock exchange, pointing out
that the shares had risen in July 2002 as a result of rumours
of nationalisation, only to fall again in September because,
although the market had got wind of a possible EUR 15
billion capital increase, the practical arrangements were not
as yet clear. It points out that France Télécom's financial
projections presage,
for the State, a highly satisfactory
return: according to the DCF — discounted cash flow —
method, the recapitalisation involves an annual rate of
rate on the
return of 25 %, whereas
telecommunications market is 9,9 %.

average

the

(133) In response to the dispatch of the consultant's legal report
and economic report, France Télécom submitted three legal
memoranda
and an
economic report (87).

criticising the

reports'

content

(134) The first memorandum states

that

the various

to any finding that

third parties. More particularly,

legal
categories under French civil, commercial or administrative
law used by the consultant in its analysis of the State's
declarations are not relevant
the
ministerial declarations may be capable of creating rights
the
on the part of
memorandum claims that the conditions required for the
State's responsibility to be incurred for non-compliance
with its promise are not met in the present case. It argues
that in no way does the mere act of making a promise, even
to pay certain sums of money, suffice in itself to commit
public finances, to ‘immobilise state resources’, without a
legal instrument. It concludes on this point that there is
nothing in French case law to show that there has been a
‘transfer of state resources’ in the present case due to the
conditional promise of a shareholder loan. It adds that
there must be a link between the state resources and the
advantage granted. Litigation over promises made is
designed solely to compensate for any loss suffered by
the promise's recipient. The compensation due cannot
therefore procure for the latter an advantage.

(135) The memorandum concludes by saying that the Court of
Justice has not defined the extent to which an uncondi-
tional and legally binding promise to grant aid can be
considered as ‘having been implemented’.

(136) The second memorandum states that

the Commission
should formally extend the procedure to include the
measures analysed by the experts appointed by it as they
were not covered by the opening decision. It adds that
‘unilateral declarations made by a state authority, acting in
its role of majority shareholder, must, under French law and
under Community law, fulfil various criteria in order to be
able to be characterised as an irrevocable, clear and
unconditional commitment and in order to be able to be
characterised as state aid’. The memorandum concludes on
this point
the various declarations on which the
experts have focused manifestly do not satisfy these
conditions. According to Mr Ehlermann, the analysis put

that

forward by the experts would have as a corollary ‘a
muzzling effect on any state authority which, where it is the
majority shareholder in a company, is required to inform
the Commission in advance of any public declaration
concerning its shares, intentions or opinions as majority
shareholder within or in favour of the company it controls’.
The experts' analysis would also lead to ‘an unfounded
enrichment of that same authority which, as a result of
non-compliance with an obligation of silence, would
benefit from an order to recover funds which it has never
mobilised. The State would thus be rewarded — by the
company, which is not master of
shareholders'
declarations — for having violated this alleged “obligation
of silence”. The calculation of the aid as carried out by the
is vitiated, not only by material errors and
experts
deficiencies on the economic side as mentioned by HSBC,
but also by fundamental errors of
law which render it
invalid and unusable by the Commission.’ The memor-
andum's author challenges the quantification of the aid set
out in the expert report and states that, in quantifying the
aid, account should be taken only of the net cost to the
State of its intervention in favour of the company.

its

(137) According to the third memorandum submitted by France
Télécom, the State has not placed any credit line at France
Télécom's disposal
through ERAP. The memorandum
argues, moreover, that, under domestic law, declarations
are not legally binding on the State, either vis-à-vis France
Télécom or vis-à-vis third parties. Declarations do not
constitute a legal instrument in the ordinary-law sense, nor
are they an act giving rise to a right in the public-law sense.
The State, however, cannot commit itself without an act
giving rise to a right, carried out in compliance with the
rules on competence (the declaration in the present case is a
declaration of intent without any material implementation)
the State's
and on budgetary procedure. Moreover,
responsibility is not
the
obligation to make amends for wrongdoing does not
constitute state aid as ‘in the event of the State's being
ordered to pay damages, the transfer of resources stems, not
from the legal act
from the incurrence of
responsibility as a result of that act. And the beneficiary of
the company
the transfer of
concerned but the victim who has suffered damage’. The
memorandum's author also states that it is impossible to
notify a legal act despite the fact that, under the Treaty, all
aid measures must be notified to the Commission.

incurred and in any event

state resources

itself, but

is not

(138) The annex to the memorandum describes more particularly
the context in which the declarations were made, pointing
out that this is necessary in order to measure their true
scope. An analysis of the declarations in the light of events
between late June and December 2002 thus shows that the
declarations could not constitute a promise, and does not
show that the appropriate measures planned by the State
were financial measures. There were differences of opinion
within the Government at the time and the Minister for

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represent

the
Economic Affairs and Finance did not
government standpoint. The author states that the expert
provides no legal or factual evidence of the State's will to
commit itself. A study of the facts reveals that there was no
such intention on the part of those responsible, who were
at a loss how to solve the problem, and that operators had
never said they believed the State had committed itself to
one or other solution.

to take part in the future capital increase; (iv) the provision
by the State of a state guarantee for the benefit of ERAP
enabling the latter to borrow on the markets at a rate of
3,375 % instead of
the 10,4-10,9 % applicable to a
company with junk bond status; and (v) the apparent
transfer of France Télécom's employees within ERAP
despite the fact that they continue to work for France
Télécom.

(139) The economic report submitted by France Télécom, for its
part, stresses that the scope of the analysis contained in the
consultant's report
is highly restrictive ‘as it analyses
principally the effects of the declaration of 12 July 2002
and uses a single methodology, that of event studies’. The
report also states that the methodology used by NERA is
based on ‘a highly theoretical approach which consists in
assuming that the markets are efficient and in measuring
the impact of an event by quantifying the variations in
stock exchange prices at the time of that event. This over-
theoretical approach does not reflect the reality of the
situation of a reference shareholder’. The report stresses,
moreover, that the NERA report is ‘confused about the
profits, the sources of profits and the costs for France
Télécom and its shareholders’.

(140) The report concludes by saying that

the consultant's

conclusions are wrong because:

— ‘Analysis of the France Télécom group's situation at
the time of the announcement of the results for the
first half of 2002 shows that (i) the group has an
unbalanced balance sheet and a short-term liquidity
problem, but (ii) the business's operating results are
very good.

— Analysis of the range of measures a prudent share-
holder must envisage in a situation of heavy
indebtedness indicates that it was rational to introduce
a recovery plan,
including a recapitalisation, for a
group with healthy assets whose intrinsic worth is
greater than the sum of its market capitalisation and
its net debt.

that

— Analysis of value creation and profitability prospects
the State is making a very good
suggest
investment by participating in a capital increase and
that it is taking little risk in providing a shareholder
loan’.

4.14.

Comments from ECTA

(141) ECTA is of

the opinion that

the following measures
constitute state aid: (i) the ministerial declarations of July
and October 2002 informing the market that the State
would not leave France Télécom in financial difficulties; (ii)
the acceptance by the State of the payment of dividends for
2001 in shares and not in cash; (iii) the granting of a EUR 9
billion credit line and the advance commitment by the State

(142) The aid granted to France Télécom enabled it to maintain
an aggressive marketing and advertising policy and to
continue as an integrated operator while increasing its stake
in Orange. ECTA is of the opinion that a company in
France Télécom's situation ought to have acted altogether
differently, as did France Télécom's competitors in the
global telecommunications services market, such as British
Telecom and KPN, which had to dispose of strategic assets
to reduce their debt.

(143) ECTA is of the opinion that the measures mentioned in
paragraph 141 constitute unlawful aid and that they cannot
be justified under the Guidelines in so far as none of the
criteria laid down in those guidelines are fulfilled. In the
alternative, ECTA states that, if the Commission were to
these should be
adopt any compensatory measures,
substantial. ECTA points out under
the heading of
structural measures that, without the state aid, FT would
have had to dispose of Orange and Wanadoo. As to
behavioural measures, ECTA proposes a reduction in the
market shares of France Télécom, Equant, Orange and
Wanadoo, pointing out, however, that these latter measures
are harder to introduce than structural measures.

5.

COMMENTS FROM FRANCE

5.1.

Summary of the facts

(144) The French authorities state by way of introduction that
they have behaved in accordance with the prudent private
investor principle from the outset. Since the announcement
of France Télécom's results for the first half of 2002, which
highlighted an unbalanced financial structure and signifi-
cant capital needs despite good operating results, the State
has drawn the necessary conclusions, placing a new CEO at
the head of the Company and gathering together a banking
syndicate which undertook from September 2002 to
underwrite a capital increase when the time came. At the
same time, the State asked the new management to carry
out an in-depth audit of the Company. On the basis of the
Ambition 2005 plan, about which the majority shareholder
was kept regularly informed, and of the banking syndicate's
commitment, the State announced, on 4 December 2002,
its decision to participate in the strengthening of
the
Company's capital base to the tune of EUR 9 billion and the
fact that it was prepared to place at France Télécom's
disposal, through ERAP, an advance on this subscription

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the
remunerated at market rates. However,
financial terms of grant of this advance by the French
authorities and of the Commission's misgivings about the
presence of aid elements in the measure, France Télécom
preferred to resort directly to the bond market.

in view of

(145) The French authorities then point out that the total amount
of the financing resulting from the bond issues came to
approximately EUR 9 billion, equivalent to the maximum
amount of the advance constituted by the shareholder loan.
They state that the success of the bond issues demonstrated
France Télécom's ability to gain access to the financial
markets under good conditions as well as the markets'
confidence in the operational measures contained in the
TOP plan and in the new management's ability to
implement it. They also state that the capital increase was
launched as soon as was technically possible, namely on
24 March 2003, and that it was a success.

(146) At the meeting between the French authorities and the
Commission on 22 January 2004 the French authorities
stressed that, in their view, the recapitalisation operation
satisfied the prudent investor test and that, consequently,
the financial measures granted by the State to France
Télécom did not contain any aid element. In their opinion,
the prudent investor test may be defined as the need, before
acting, to appoint a new CEO, to conduct an audit and to
prepare a credible plan. The chronology of events illustrated
by the French authorities in itself demonstrated the prudent
character of the State's conduct. The French authorities
emphasise that, with these factors under control, they were
masters of the situation (in particular the issue price).

(148) On the criterion concerning the movement in company
capital referred to in point 5(a) of the Guidelines, the
French authorities point out that the relevant indicator is,
pursuant to Article L225-248 of the Commercial Code, the
company capital of France Télécom SA, which has always
remained positive and has never fallen by half. France
Télécom was therefore not in the situation referred to in the
Guidelines in which shareholders'
funds fall below the
company capital.

(149) France Télécom was not

in a cessation of payments
situation; there were merely signs of a possible liquidity
requirement by the first half of 2003 should the expected
market recovery not occur. The French authorities add that
France Télécom had anticipated reserves of EUR 6,9 billion
as at 31 December 2003 and could have crossed the
the year 2003 without resorting to the
threshold of
financial market. At the meeting on 22 January 2004, the
French authorities indicated that France Télécom had had
recourse to the syndicated loan, which was less expensive
than the bond market and out of which EUR 4 billion had
been made available to the Company.

(150) The French authorities observe inter alia that France
Télécom had access to the financial markets during the
course of 2002 and describe all of
the financing
instruments at the Company's disposal between 11 July
2002 and 15 January 2003 (88). They mention the fact that,
on 14 February 2002, France Télécom negotiated the
provision of a syndicated credit line of EUR 15 billion and
that during the course of 2002 the Company issued
bonds (89), EUR 442,2 million worth of which was
repayable in shares.

5.2.

The Company's financial situation

(151) The French authorities also state that France Télécom was
not open to any financial risk owing to the downgrading of
its credit rating by the rating agencies as there was no early
repayment clause in the covenants.

(147) The French authorities maintain that, when the decision to
invest was taken, France Télécom was not a firm in
difficulty within the meaning of
the Guidelines. The
Company's turnover was increasing steadily (by 10 %
between the first half of 2001 and the first half of 2002),
and its gross cash flow was high and growing faster than its
turnover. Despite this, the French authorities refer to the
Company's unbalanced financial structure as at 30 June
2002 and point out that the losses were mainly due to the
exceptional provisions and write-downs linked to the
depreciation of assets acquired prior
to the entirely
unforeseeable reversal of the markets. France Télécom's
operating costs were increasing more slowly than its
turnover, which meant that its profitability was improving.
Moreover, operating results and cash flow were increasing
(with cash flow up 15 % on the first half of 2001). France
Télécom's very good performance prospects were further
improved by the TOP plan. This performance was
confirmed when the 2002 accounts were published,
showing as they did the virtuous dynamic triggered within
the Company by the new management.

(152) Moreover, according to the concordant opinion of several
consultant banks consulted between June and November
2002, France Télécom was, prior to the announcement of
the Ambition 2005 plan and of the majority shareholder's
support, able to refinance itself on the bond markets. The
French authorities thus indicate that, in July and September
2002 respectively, […] (*) and […] offered to refinance,
starting in October or
through swap programmes
November, France Télécom's bond debts maturing between
2003 and 2005.

(153) As to the statement by France Télécom's former CEO to the
effect that the Company no longer had access to the
market (90),
that his
the
opinion was necessarily subjective
circumstances.

the French authorities point out

in view of

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5.3.

Duty of care of the State as shareholder

of 2003 without even having to resort to the financial
markets. Moreover, a disposal of strategic assets would not
have been in the interests of France Télécom and its
shareholders in the medium to long term.

(154) As regards the allegation that the State had failed in its duty
of care as shareholder with regard to the Company's past
conduct, the French authorities maintain that the argument
to the effect that a prudent investor would not have found
himself
in the same situation as the French State is
irrelevant as, according to well established case law, the
Commission has to place its analysis at the time when the
investment decision was taken, unless it can be shown that
the State's past conduct involves aid elements, something
which has not been claimed in the present case. At all
events, even if the legal obligation on the State to hold a
majority of
the capital placed France Télécom at a
disadvantage, the Commission cannot, without violating
the neutrality principle enshrined in the Treaty, call into
question the French authorities' choice to maintain the
Company in the public sector. The French authorities stress
that they intervened as soon as they became aware of the
financial difficulties encountered by the Company. In their
comments of 29 July 2003, the French authorities insist on
the fact that, according to the judgment in Stardust (91), it is
necessary to place oneself in the context of the period
during which the financial support measures were taken
and that this ‘… excludes automatically the period before
July 2002’. They also stress that the payment in shares of
the dividends for 2001 was in keeping with the prudent
private investor principle inasmuch as there was at that
time a strong potential for an increase in the share price.

5.4.

Rationality of the TOP plan

(155) The French authorities stress that, in the light of the above,
the increase in the cash flow and the strengthening of the
capital base provided for in the Ambition 2005 plan are
components of a strategy that would have been followed by
any prudent majority shareholder. Hence, owing to the fact
that the Company's fundamentals were healthy, France
Télécom's
situation cannot be compared to that of
companies such as Vivendi Universal or Crédit Lyonnais.

(156) As to the rationality of the TOP plan, the French authorities
state that the plan in question represents a considerable
effort on the Company's part. It is an overall plan for a
change of management direction based on specific actions
which has already produced its first positive results. The
French authorities stress in this connection that the plan is
an extremely precise one which makes possible an increase
in the Company's profitability with a rate of return on
investment (RRI) of 43 % in 2005 for those investors who
participated in the April 2003 capital increase, that is, a
much higher return than the reference RRI (11 %) expected
by a private investor in the telecommunications sector. The
TOP plan also includes a staff management optimisation
chapter. As to the disposal plan, the French authorities state
that the disposal of assets at the end of 2002 made it
possible to carry forward any liquidity constraint to the end

(157) The French authorities stress,

that

lastly,

the strategies
followed by competing operators are no more prudent and
that a plan must be assessed, not in the light of the scope or
strategic character of the assets whose disposal
is being
contemplated, but in that of the rationality of the plan as a
whole. Moreover, the success of the December 2002 and
January 2003 bond issues confirmed a posteriori
the
confidence private investors place in the Company's
operational potential.

5.5.

Application of the prudent investor principle

to the participation in the strengthening of the
Company's capital base

(158) With regard to the application of

the prudent private
investor principle to the announcement by the State of its
the
anticipated participation in the strengthening of
Company's capital base, the French authorities observe
that
they made their agreement conditional on the
presentation, by the new management, of a new, credible
rebalancing plan and on participation by the banks.

(159) On compliance with the concomitance principle,

the
French authorities point out that, from the outset, the
State shareholder took every step to ensure the concomi-
tant participation of public and private shareholders and
that it took no risk before private investors did. Thus, the
announcement of the State's intention to participate in the
strengthening of the Company's capital base dates from
12 September 2002 (92), and on that date a banking
syndicate had already undertaken to underwrite, when the
time came,
increase which was
intended for private investors alongside the public share-
holder, on condition that a credible rebalancing plan was
announced to the market. The French authorities stress that
this condition was normal
in view of France Télécom's
unbalanced financial situation, the State's participation also
being conditional on the announcement of a plan
considered by the market to be credible. They add that, if
the private investors had not stood guarantors, the State
would not have made such an announcement.

that part of a capital

(160) The French authorities also state that the private financing
predated the public financing inasmuch as the financial
contributions by private investors — in the form of
debenture loans and the rescheduling of bank loans
between December 2002 and February 2003 — took
place in significant proportions. The analysis of any making
in the French authorities'
available of state funds must,
view, be carried out in the light of such private financing.

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(161) The French authorities maintain that the recapitalisation
operation carried out on 24 March 2003 complies with the
concomitance principle. The State, for its part, made no
capital contribution before the private shareholders did, as
can be seen from the arrangements for the shareholder loan
described in point 5.6, which included no unconditional
recapitalisation commitment by the State before March
2003. The banks' undertaking of September 2002 referred
to in paragraph 159 was thus confirmed by the banking
syndicate's formal guarantee in March 2003 and enabled
the State to take no risk as regards the participation of
private investors
increase. The French
authorities stress that, in accordance with the judgment in
Alitalia (93), the State did not commit itself formally prior to
the banks' formal undertaking. The private shareholder
participation is significant at 40 %, which has been held by
the Court of Justice to be in keeping with the concomitance
principle. The underwriting banking syndicate was selected
by open tender, which ensured that the banks' remunera-
tion corresponded to optimised market conditions, notably
as regards the commission paid to the banks. The French
authorities also mention that the commissions paid in the
present case ([…] % of the total amount underwritten) are
in keeping with the guidelines set out
in the Alitalia
decision of 19 June 2002 (94).

in the capital

(162) As regards the expected return, the French authorities state
that, as has already been indicated, compliance with the
prudent private investor principle is also demonstrated by
the TOP plan, as
the high profitability prospects of
confirmed by the plan's favourable reception by the
market. They maintain, moreover, that, when the invest-
ment decision was taken, France Télécom was not a firm in
difficulty within the meaning of the Guidelines and that the
Company had access to the financial markets during the
second half of 2002.

(163) The French authorities stress that the capital increase was
effected as soon as it was technically possible to present to
the State and to investors updated data on the Company's
the State's
operational prospects, which demonstrates
choice of high-quality investors motivated by long-term
return prospects. The French authorities point out that the
timetable constraints were technical constraints linked to
France Télécom independent of any favourable stock
market conditions.

(164) The French authorities state that

the operation was a
success and that the fixed amount underwritten was more
than five times that sought from the market.

(165) The French authorities add that

the
recapitalisation is not a relevant factor and that all that
matters is whether the operation was rational. At all events,

the amount of

the amount in the present case was not excessive compared
with, say, the capital increase in the case of KPN.

(166) Concluding on this point, the French authorities stress that
the capital increase seems already (the French authorities'
comments date from July 2003) to be a prudent investment
as France Télécom's share price has risen by almost 50 %
compared with the rate of capital increase.

(167) As to the repayment of the ERAP loan by the State as
in
announced by the deputy Minister for the Budget
December 2002,
it concerns only the modalities for
investment by the State and has no impact on relations
between the State, the shareholders and the Company.

5.6.

The shareholder loan

(168) The French authorities maintain that the loan proposal was
never signed by France Télécom owing to the excessive cost
of the financial terms proposed to it and the fact that the
the measure's
Commission was
raising doubts about
lawfulness under
the Treaty. Consequently, no state
resources were placed at the Company's disposal via the
shareholder loan proposal. The French authorities argue
that the entry into force of the loan cannot be deduced
from the announcement made by the State on 4 December
2002, which concerns only the commitment by the State
shareholder to participate in the operation to strengthen
the Company's capital base, mention being made only of
the ‘possible’ (95) provision of a shareholder loan.

(169) The French authorities observe that, at all events, the loan
proposal conferred no advantage on France Télécom.

(170) The French authorities thus make clear that, in so far as it
has not entered into force, the loan has not been used by
the Company and therefore has not been able to postpone
the Company's liquidity needs. They maintain that the loan
announcement does not constitute a guarantee. French law
does not recognise an implicit guarantee: any guarantee
provided by the State must be enshrined in a law. It is
wrong to treat the announcement of a possible state loan as
a guarantee. The French authorities insist that the guarantee
which the State provided to ERAP to enable it to finance its
participation in the strengthening of France Télécom's
capital base must not be equated with a guarantee given to
France Télécom. As far as ERAP is concerned, the French
authorities state categorically that
its role was entirely
neutral and that it intervened only for budgetary reasons.

(171) Likewise, the announcement by the State of a loan proposal
did not facilitate France Télécom's access to the bond
market. First of all, the debenture loans are not covered by
any sort of guarantee, their duration being longer than that

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of the shareholder loan. Moreover, bondholders have no
recourse in the event of non-payment upon maturity.
Secondly, it is not possible to compare the announcement,
by the State, of the possibility of its making an upfront
prepayment towards the strengthening of the Company's
capital base with the guarantee given in the above-
mentioned Crédit Foncier de France decision because,
inasmuch as the loan envisaged in the present case was
hypothetical and strictly limited in duration and amount, it
could not by itself
financial
problems having regard to its debt repayment schedule.
Thirdly, the bond issues were determined solely by the
market's perception of France Télécom's capacity to honour
its commitments unaided by any state guarantee. This is
attested to by the spreads, which are consistent with France
Télécom's credit rating and therefore appreciably higher
than those of other operators. The confidence shown by the
market at the time of the said bond issues is thus due
essentially to the change in the management team and the
favourable reception accorded to the new strategy revealed
when the Ambition 2005 plan was presented.

resolve the Company's

that

logical

(172) As to compliance with the prudent investor principle in
relation to any shareholder loan, the French authorities
stress that, when the decision to take part in a capital
increase was taken and the conditions therefor were met
(credible plan and management, underwriting syndicate), it
was
the State should make an upfront
prepayment. The first discussions about the loan proposal
date back to November 2002. The French authorities also
stress that the legitimacy of such a measure could not be
challenged because, as is mentioned above, it was based on
a credible, detailed plan the content of which was mostly
known at the time of
the loan
proposal on 4 December 2002. Moreover, the State had
already received the undertaking, conditional on the
presentation to the market of a credible plan, from the
banking syndicate and it knew full well at the end of
November that that condition would be met given the
market's positive reaction to the appointment of the new
management. The French authorities stress in this connec-
tion that it is not pertinent to assess the amount involved in
the present case but that, in accordance with the Alitalia
judgment, it is necessary to examine the conformity of the
conditions of financing the operation for a company of
comparable size.

the announcement of

(173) As to the remuneration of the potential loan, the French
authorities stress that it was granted on normal market
terms and that it was increased by a premium to reflect its
subordinate nature. The proposal provided for a non-
utilisation commission and the absence of security was in
keeping with the practice of a prudent investor in the case
of a short-term loan granted by a shareholder upfront of his

subscription to a capital increase. The repayment of the
sum in shares was customary and was based on the cash
value.

(174) The French authorities state that, in accordance with the
Alitalia judgment, rather than compare the strategy chosen
by the public shareholder with alternative solutions
involving less risk, the Commission should assess whether,
in similar circumstances, a private investor could have taken
such a measure.

5.7.

The announcements made by the State

(175) In their comments of 29 July 2003, the French authorities
stress the context which must be taken into account when
analysing the declarations made by the State in its capacity
as a prudent shareholder and not as a public authority.
Thus, between the months of September and December
2002, the State engineered a change in management the
key feature of which was the change in the Company's CEO
and closely monitored the drafting of a rebalancing plan
while at the same time ensuring the support of private
investors with a eye to the launch of a possible capital
increase (see above for a detailed description of the State's
intervention). According to the French authorities, these
operational measures had a decisive financial impact, were
very well received by the financial markets and led to the
recovery in France Télécom's share price.

suggested that

(176) The French authorities stress that the State never indicated
or
it would give France Télécom its
unconditional and unlimited support. They add that ‘the
State … emphasised in the summer [the French authorities
are referring to the statement made by the Minister for
Economic Affairs on 12 July] that it would act like a
prudent private shareholder and not as a public authority
and that it intended to intervene as a shareholder in a way
(still to be defined) which would be no different from that
which a private investor would choose, which necessarily
ruled out the possibility that the State had already decided
to intervene in an unconditional and irrevocable man-
ner’ (96). This declaration that the conditions would not
differ from those of a private investor, excludes de facto any
unconditional and irrevocable support. The French autho-
rities also argue that the declarations made by the French
authorities between July and October 2002 constituted
‘vague prior declarations’ without any ‘corresponding
practical measures’ (97). The French authorities state in this
connection that the subsequent declarations were to be
assessed in the light of the first declaration and that it is
wrong to assert that as of 12 July 2002 the State had
‘committed itself irrevocably to supporting France Télécom’
and had, on that occasion, entered into ‘an irrevocable
commitment to participate in the strengthening of the

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L 257/39

capital base’. The French authorities point out that the State
shareholder announced its intention to participate in the
strengthening of the Company's capital base for the first
time in September 2002 and that ‘this would take the form
of a transaction followed by the market (reference to a
timetable to be defined in the light of market condi-
tions) (98)’.

(177) Concerning the declaration of 2 October 2002, the French
authorities argue that this confirmed that the presentation
of a credible plan was a precondition for the State's
participation.

(178) The French authorities state that, at all events, it was not
possible ‘to deduce from the lack of precision of the State's
declarations concerning France Télécom between July and
October 2002, despite the State having indicated that it
would act like a prudent investor, any intention on the
State's part — nor a fortiori any commitment- to take
measures which would contravene the Community rules on
the Treaty rules cannot be
state aid.
presumed and cannot be caused by vague declarations prior
to a decision without any measures translating them into
practice’ (99).

Infringement of

(179) The French authorities maintain that

‘the only specific
measures envisaged by the State in its capacity as majority
shareholder in France Télécom are those set out in the
information/notification dossier forwarded to the Commis-
sion and announced publicly on 5 December 2002, namely
the participation alongside private shareholders in a EUR
15 billion capital increase in proportion to the share held
by the State in France Télécom's capital and a possible
shareholder loan remunerated at market rates upfront of
the capital
increase. The indication by the State that it
would play its role of prudent shareholder in no way
constitutes a state guarantee. If the declarations made by
the State between July and October 2002 had really been
legally equivalent to, or even simply perceived by the
market and the rating agencies as being, a promise to
provide France Télécom with an “unlimited guarantee”,
then there would not have been any downgrading of France
Télécom's rating in July and the company's spreads and
rating during that period would have reflected the state risk
(AAA rating and very low spread). Lastly, any factoring in
by the rating agencies of the State's presence as majority
shareholder irrespective of any implicit or explicit guaran-
tee or of any specific measure and irrespective of the
company's specific financial situation at any given moment
cannot in itself be considered state aid. Such an approach
would be contrary to the principle of neutrality of
Community law as recognised by Article 295 of the EC
Treaty’ (100).

5.8.

Movements in France Télécom's share price

and spreads

(180) The French authorities argue that only the operational
measures had an impact on France Télécom's share price.

the participation by the State

Thus, the Company's share price rebounded on 2 October
2002 (up more than 10,4 % on the previous week)
following the announcement of the appointment of the
new CEO,
indicative of a new operational management
style, and the share price's progress continued upwards
with the announcement of the TOP plan and of the new
executive board on 5 December 2002, which led to a rise
of more than 25 % in two days. The French authorities
maintain that
in a
strengthening of
the capital base and in a possible
shareholder loan constituted measures described in the
press before 5 December 2002 and cannot therefore be
considered as being behind the share price increase. The
declarations of principle made by the State between July
and October 2002 were not the determining factor in this
increase and as long as there were no operational measures
the share price fluctuated, reflecting the market's uncer-
tainty about the Company's situation, and the Mobilcom
risk in particular. This perception led to a fall in the share
price, which reached its lowest point on 30 September
2002 following a period of relative stability during the
summer in the absence of any specific announcements or
rumours. During that period, the State's declarations as to
its intention to play fully its role of shareholder did not stop
the downward trend in France Télécom's share price.

(181) As to movements in France Télécom's spreads, the French
they cannot be relied upon to
authorities state that
highlight alleged support for the Company linked to the
July declarations. A comparative analysis of the spreads of
France Télécom and Deutsche Telekom since January 2002
shows a certain similarity throughout
the period con-
cerned: France Télécom's spreads narrowed in July 2002,
reflecting the assessment of the telecoms risk indepen-
dently of the State's declarations. Moreover, the spreads
widened in December 2002 following the announcement
by the State of the operational measures it was considering
taking. The French authorities conclude that the move-
ments in France Télécom's spreads are linked to trends in
the telecommunications sector and that the State's declara-
tions were not a decisive factor.

(182) In response to the dispatch of the consultant's legal report
and economic report on 9 and 10 June 2003, the French
authorities maintained that remarks made by the Minister
for Economic Affairs and Finance in an interview published
in Les Échos on 12 July 2002 are outside the scope of the
investigation procedure opened by the Commission on
30 January 2003. The Commission was, they claimed, no
longer able to extend the procedure to include these
remarks as the 18-month period provided for in Article 7
(6) of Council Regulation (EC) No 659/1999 of 22 March
1999 laying down detailed rules for the application of
Article 93 of the EC Treaty (101) had almost expired. At all
events, they reserved the right to present to the Commis-
sion further expert opinions on the consultant's reports.

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(183) The French authorities have presented the following

comments on the legal report:

— They point out ‘first of all that the legal report is based
on an erroneous (not to say tendentious) interpreta-
tion of the facts. In particular, … the report manifestly
twists — albeit clear — remarks made by the Minister
for Economic Affairs in the course of an interview
with a journalist published in July 2002. The French
authorities strongly contest
is possible to
propose interpretations as unfounded as these in
order to draw legal conclusions and in particular to
assert that there exists any guarantee granted by the
State to France Télécom’.

that

it

— ‘They reiterate … that the State as shareholder in
France Télécom has not only always intended to
behave like a prudent investor with regard to France
Télécom but has also chosen to express clearly and
publicly that this position would be the point of
departure for all of its potential actions in this area
…’. The Minister's July 2002 interview makes no
‘… [W]hile
mention of any decision being taken.
remaining confident in the company's viability, the
State was merely taking note of the market's doubts
about France Télécom's situation and, in its capacity
as majority shareholder, was trying to refine its
analysis without being able, at that stage, to make an
accurate diagnosis or take any decision’.
‘Moreover,
there was no reason to suppose a priori that the phrase
“appropriate steps” referred specifically to financial
measures’.

is

— ‘The French authorities have also noted numerous
inaccuracies in the reasoning set out in the legal
report. The report
thus manifestly short on
objectivity, adopting highly contestable legal analyses
(for example regarding the characterisation of letters
of intent and the scope of a unilateral commitment in
civil and commercial law) and making an unjustified
application to the facts at issue of certain irrelevant
legal precepts (this is the case, for example, with the
application of the theory of business management or
of the rules of public international law in relations
between a company and its majority shareholder’.

— ‘The legal report's finding of

it

intent

intent,

the letter of

effectiveness of

an appeal — relates

the existence of an
“unlimited guarantee”, granted by the State to France
Télécom, is in any event totally baseless in Commu-
nity law’. In accordance with the Compagnie nationale
Air France judgment (102), the remarks in question
cannot give rise to any firm and unconditional
commitment on the part of the State. Similarly, ‘the
solution adopted in the Crédit foncier de France case —
assuming it is in keeping with Community law, which
is not certain as the decision has not been the subject
to radically different
of
circumstances’.
‘What is involved here is not even
an official communiqué from the Government or
from France Télécom, but merely a press article
reproducing the text of an interview with the Minister
for Economic Affairs in the wider context of the
Government's priorities and therefore lacking any
probative force’.
‘Attempts to place the Minister's
remarks of 12 July 2002 in some domestic-law legal
categories (especially company law and administrative
law) likewise do not succeed in proving the existence
of any guarantee in favour of France Télécom’. With
regard to the comparison between the Minister's July
declarations and a letter of
the French
authorities stress that ‘(i) firstly, it is of the essence
of
is addressed to a
that
beneficiary; (ii) secondly, and as an extension of the
preceding observation,
the
the
method is dependent on acceptance by the said
beneficiary; and (iii), lastly, the scope of the commit-
ment given (both as regards its object and as regards
the force which its author wishes to give to it)
depends exclusively on the terms employed’. ‘Thus …
the general — to say the least — character of the
Minister's remarks … rules out without doubt any
commitment
in favour of France Télécom or its
creditors, and a fortiori any obligation as to the result
to be achieved (and hence any idea of guarantee) as
well as any obligation as to the means’. ‘The Minister's
reply … only confirms that no decision — other than
to act like a “prudent investor” — had as yet been
taken by the State shareholder, which, while trusting
in the operational quality of the company, was not at
time able to make a sufficiently accurate
that
diagnosis or to take any decision’.
‘The courts have
… never held that a guarantee commitment without a
specific beneficiary or beneficiaries may thus be relied
upon by any person who might have an interest
therein. This is not surprising as it is in the nature of a
guarantee or of a letter of intent that it is addressed to
one or more beneficiaries. Nor is it surprising, since it
was not intended for any specific beneficiary, that the
alleged commitment was not accepted’. As for the
business management hypothesis,
is
entirely inapplicable to the present case.
‘Regarding
Article L.465-1 of the Monetary and Financial Code,
the French authorities have stressed that supposing it
to be transposable to the State, it would condemn, not
the mere changing by the State of its intentions, but
only the declaring of an intention that was false or
misleading from the outset, which was manifestly not
the case here inasmuch as the remarks only reflected
the lack of any decision whatsoever in the then state
of the shareholder's knowledge’. As far as adminis-
trative law is concerned,
the French authorities
maintain that ‘[f]irst of all, mere remarks made to a
journalist — such as those made by the Minister for
Economic Affairs on 12 July 2002 — do not

this concept

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constitute a “tortious act” capable of giving rise to
rights and obligations, and even less a guarantee
granted to France Télécom by the State. Secondly, the
liability of the State can in no way be incurred by
reason of the highly general remarks made by the
Minister, whether because of their alleged lack of
implementation — the broken promise hypothesis —
or, conversely, because of their implementation — the
unlawful promise hypothesis’.

— ‘The legal consultant's conclusions clearly fly in the
face of the Commission's decision-making practice
and of Community case law in the field of state aid,
which make the existence of aid conditional on proof
of a firm, precise and unconditional commitment on
the part of the State concerned — something which
the Minister's remarks of 12 July 2002 could in no
way be construed as being.’
in
whatever
form, must be sufficiently precise and
concrete for the Commission to be able to determine
the very existence of an advantage’.
‘To be able to
apply the prudent investor test, the Commission must
have at its disposal all the necessary information
concerning the specific modalities of the measure that
is being scrutinised’.

‘A state measure,

— ‘The adoption by the Commission of

the legal
consultant's arguments would have discriminatory
effects which would run counter to the principle of
legal certainty. In particular, the reasoning followed by
the consultant would have absurd procedural con-
sequences in that each Member State would be obliged
to notify to the Commission the slightest plan to give
an interview or make a public declaration about a
company of which it was the reference shareholder’.
Moreover, this argument would result in unjustified
discrimination between the Community institutions
a principle of
and the Member States.
Community law that no person may rely even on
promises made by a Community institution in the
absence of “specific, unconditional and concordant
assurances,
reliable
sources, given to him by the administration”’ (103).

emanating from authorised,

‘It

is

— ‘More fundamentally, the approach adopted by the
legal consultant is likely to undermine the principle of
neutrality enshrined in Article 295 of the EC Treaty
and would make it impossible to apply the prudent
investor test. If the consultant's reasoning were taken
to its logical conclusion, any public intervention by a
State in relation to a public undertaking would thus
constitute aid and a State would therefore always be
presumed to act as a public authority and not in the
capacity of a shareholder in the undertaking’.

(184) The French authorities have presented the following

comments on the economic report:

— ‘The economic consultant's conclusions have no
intrinsic validity inasmuch as they are based exclu-
sively on the mistaken premiss (contained in the legal
report) that France Télécom received an “unlimited
guarantee” from the State’.

— ‘Moreover … the economic report in no way shows
that the company enjoyed any advantage over its
competitors’.

issues,

— ‘The microeconomic method of the event study used
by the economic consultant raises a number of
including the use of the very
fundamental
short-term trend in the share price as the sole measure
of changes in the value of the company contrary to
recognised usage (including by the Community
courts (104) regarding valuation, and this despite the
fact that the manifest errors committed recently by
the markets in assessing the value of telecommunica-
tions operators call
to say the least, serious
caution. What is more, the economic consultant is
completely ignorant of
the
situation with regard to the France Télécom share at
the material time, such as its historically high level of
volatility, which clearly rule out the use of this method
in the present case’.

specificities of

for,

the

— ‘The event study method is all the more inappropriate
in the present case as the share price did not move in
only one direction during the relevant period, but
underwent a rapid succession of strong rises and falls
in response to the multitude of contradictory factors
influencing the share price at that time, with the result
that the consultant is wrong to carry out his analyses
in the light of a single factor (the ministerial interview
on 12 July 2002) to the exclusion of all others (despite
the fact that there are no grounds for asserting that
market operators considered the ministerial interview
to be an important factor for investors in July 2002)’.
‘The markets thus received at that time information
about the situation of the company itself (for example,
on the risk associated with MobilCom)’.

— ‘Moreover, the consultant's calculations are in reality
essentially determined by the choice of methodologi-
cal hypotheses (such as the observation window and
assessment period), established as they are without
any solid justification and in a largely arbitrary
manner, which deprives his findings of any probative
value’.
‘The amount calculated by the economic
consultant is essentially linked to the utilisation of a
reference trend in France Télécom's share price which
bears no relationship to the event examined in the
study (the Minister's comments of 12 July 2002)’.
‘Furthermore, the consultant's deductions are contra-

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dicted by simple, unavoidable tests such as the
observation that, over the relevant period, France
Télécom's shares and bonds moved in quite a similar
its closest comparable
way to the securities of
competitor, Deutsche Telekom’. The
consultant's
‘the unjustified
report can also be criticised for
heterogeneousness of the method of reconstituting
the “normal” movement’ in shares and bonds, or the
lack of care taken by the consultant
in giving
prominence to a ‘normal’ trend in market indebted-
ness on the basis of certain highly illiquid bond lines
or in extrapolating the market value of a few bonds
from the totality of the debt. Likewise, the extremely
fragile basis of the theoretical calculation carried out
by the consultant to estimate, on the basis of credit
default
the alleged
guarantee granted by the State to France Télécom
should be emphasised. The calculation takes no
account of the specific rarity of CDSs during the
period studied, which explains the excessive reactivity
of that instrument (compared, for instance, with bond
spreads) and rules it out as a suitable measuring stick
over that period.

the cost of

(‘CDSs’),

swaps

— ‘The economic consultant's conclusions as to the
existence of supposed aid granted to France Télécom
are based, moreover, on errors of reasoning and stem
from a confusion between the alleged increase in the
theoretical market value of the company, the profit
increase by shareholders and
derived from that
debtors, and the conferment of a supposed advantage
on the company’.
‘The consultant proceeds on the
assumption that state aid increases the value of the
company receiving it … [whereas] it should not be
overlooked that market operators are nowadays fully
aware of the risks which the grant of incompatible aid
poses for a company … Consequently, … if it were to
be perceived by the markets as unlawful, the grant of
aid might lead to … a fall in the company's share price
and hence in its market value’.

— ‘Such conclusions, which are based exclusively on an
ex post analysis of the alleged “guarantee” granted by
the State to France Télécom, are, moreover, incompa-
tible with the assessment of the investor criterion,
which calls for an ex ante evaluation’.

absence of any aid element in the financial measures
forming the subject-matter of
the Commission's
investigation’.

6.

OBJECT OF THE PRESENT DECISION

(185) On 4 December 2002, the Commission received notifica-
tion of a shareholder loan proposal which France was
considering implementing in favour of France Télécom by
way of an upfront prepayment towards its participation in a
forthcoming operation to increase the Company's capital as
part of a recovery plan entitled ‘Ambition 2005’. The
notification's content is described in the opening decision.
In order to decide whether the measures at issue are
compatible with the Treaty, the Commission has examined
the events connected with the proposal's notification,
including the Government's declarations of
July to
September 2002 (105)(see Section 5). In carrying out this
examination, the Commission has taken the view that the
notified measures cannot be analysed without having
regard to the Government's declarations of
July to
September 2002. By these declarations, the State mani-
fested its will to take appropriate steps to resolve France
Télécom's financial difficulties. Thus, the shareholder loan
proposal
intentions previously
expressed by the State. From a material point of view, there
is no legal reason to limit the examination of the relevant
facts to the facts which the Member State has decided to
mention in the notification. The concept of aid is an
objective concept based on economic reality. It follows that,
if the Commission has knowledge of earlier facts which are
objectively relevant, it must include them in its analysis.

is the concretisation of

(186) In the present case,

the Commission notes that

the
measures of December 2002, which were the subject-
matter of
the notification, were preceded by several
declarations and measures by the French authorities dating
from July. Firstly, these declarations and measures make it
possible to better understand the reasons for and scope of
the December measures. Secondly, they definitely had an
impact on the perception which the markets and economic
operators had of France Télécom's situation in December.
Inasmuch as the conduct of economic operators was itself
influenced by the conduct of
it does not
constitute an objective parameter for then judging the
conduct of
interventions must
therefore be taken into account in analysing the presence of
aid in the December measures.

the State. These prior

the State,

— ‘Last but not least, the economic report observes, as if
there was any need to, that France Télécom was not a
firm in difficulty at the time of the events in question
(as it had access to the capital markets and no long-
term viability problem) and that the participation by
the State shareholder in the plan to rebalance the
company's balance sheet was in keeping with the
thereby confirming the
private investor criterion,

(187) It

is possible to view the successive declarations and
measures of the French authorities from July 2002 onwards
as forming a set which took concrete shape in the
December measures (making available of a shareholder
loan), these being the measures which were notified. Of
course, aid can be said to exist only in so far as the various

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elements of the aid concept are present (selective advantage,
state resources, and effect on trade and competition).

7.

ASSESSMENT OF THE MEASURE AT ISSUE IN THE
LIGHT OF ARTICLE 87(1) OF THE TREATY

(188) The analysis of the present case suggests at first sight the
existence of a time lag between the advantages for the
Company, which were particularly distinct in July, and the
potential commitment of state resources, which seems to
be more clearly established in December. Inasmuch as they
clearly had an effect on the markets and conferred an
advantage on the Company,
the declarations by the
Minister
for Economic Affairs and Finance may be
characterised as aid. It would not be easy, however, to
July 2002
establish beyond all doubt whether
declarations were of such a character as to commit, at
least potentially,
the
Commission has carefully analysed numerous legal argu-
ments seeking to show, firstly, that such public declarations
were equivalent from a legal standpoint to a state guarantee
and, secondly, that they placed the State's reputation on the
line, with economic costs in the event of non-compliance.
Taken as a whole, these elements might be thought to
actually risk putting state resources in jeopardy (either by
making the State liable towards investors, or by increasing
the cost of future state transactions). The argument to the
effect that the July 2002 declarations are aid is therefore
innovative, but probably not without foundation.

state resources.

In this

respect,

the

(189) The Commission does not, however, have sufficient
evidence in the present case to establish irrefutably the
existence of aid on the basis of this innovative argument.
On the other hand, it does consider that it can establish the
existence of aid elements by following a more traditional
approach, taking as a basis the December measures which
were the subject-matter of the notification.

(190) For one thing, the existence of a commitment of state
resources is clear in December. For another, the existence of
an advantage for the Company in December is also evident
as soon as one takes account of the impact on the markets
of the prior declarations and measures.

(191) In this connection,

the ‘private investor

there is scarcely any doubt

in a market
economy’ test cannot be used to justify this December
intervention as the French authorities claim, inasmuch as
in December was clearly
economic operators' conduct
influenced by the prior actions and declarations of the
Government since July. While it may be doubted that the
July declarations were sufficiently concrete to constitute aid
that such
in themselves,
declarations were more than sufficient to ‘contaminate’
the markets' perception and to influence
economic
operators' subsequent conduct. If such is the case, this
conduct on the part of economic operators cannot be taken
as a neutral point of comparison from which to judge the
State's conduct. The presumption based on the ‘private
investor in a market economy’ test cannot therefore take as
point of departure the market situation as it was in
December but ought logically to be based on a market
the prior
situation uncontaminated by the impact of
declarations.

(192) Article 87(1) of the Treaty provides that any aid granted by
a Member State or through state resources in any form
whatsoever which distorts or threatens to distort competi-
tion by favouring certain undertakings or the production of
in so far as it affects trade between
certain goods is,
Member States,
incompatible with the common market.
The Treaty does not distinguish between measures of State
intervention by reference to their causes or their aims but
defines them in relation to their effects (106). The concept of
aid refers to state measures which, in any form whatsoever,
are likely directly or indirectly to favour certain under-
takings or products in an appreciable way and which
to distort competition (107).
threaten, even potentially,
According to well established case law, the concept of aid
embraces not only subsidies themselves, but also interven-
tions which, in various forms, mitigate the charges which
are normally included in the budget of an undertaking and
which, without
therefore being subsidies in the strict
meaning of the word, are similar in character and have the
same effect (108). It follows from the above that the concept
of aid is based on the economic concept of advantage, the
formal criterion being therefore immaterial (109). In con-
clusion, the concept of aid is an objective concept which
takes no account of the legal form of a state measure, being
exclusively concerned with the latter's effects (110). Conse-
quently, these provisions must be interpreted not on the
basis of formal criteria but rather by reference to their
purpose, which, according to Article 3(g) of the Treaty, is to
ensure that competition is not distorted (111).

(193) For a measure to qualify as aid, several elements must be
present: a selective advantage, granted through state
resources, which distorts or threatens to distort competi-
tion and trade between Member States.

(194) As regards the advantage, the Commission would observe
that the shareholder loan (which constitutes the upfront
prepayment by the State towards the Company's recapita-
lisation), confers an advantage on France Télécom as it
enables it to increase its means of financing and to reassure
the market as to its capacity to meet its maturities. Even if
the loan agreement has never been signed, the appearance
given to the market of the existence of such a loan is likely
to confer an advantage on France Télécom as the market
has considered the Company's financial situation to be
more
influenced France
Télécom's borrowing terms.

secure (112). This may have

(195) As

to the condition relating to state resources,

the
Commission would point out
that an
advantage results from the giving of a state commitment
leading to a potential, but not
transfer of
the
resources does not
advantage may have been granted through state resources.

the possibility that

immediate,

rule out

the fact

that

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‘In that respect, it should first be noted that, according to
settled case-law, it is not necessary to establish in every case
that there has been a transfer of State resources for the
advantage granted to one or more undertakings to be
capable of being regarded as a State aid within the meaning
of Article 87(1) EC’ (113). Thus, even an advantage granted
through a potential additional burden for
the State
constitutes state aid where it affects competition and trade
between Member States (114).

(200) In so far as France Télécom operates in markets which have
been gradually opened up to competition since the end of
the 1980s, the declarations made by the Government as
from July 2002 are likely to affect trade between Member
States. The telecommunications sector is today one of the
most dynamic and most integrated sectors in Europe. Many
are the operators in this sector who, like France Télécom,
are active in more than one Member State (120).

(196) Contrary to what

the French authorities and France
Télécom maintain, the Commission finds that a potential
additional burden on the State's resources was created by
the announcement of the provision of the shareholder loan
coupled with the fulfilment of the preconditions for such
provision (115), by the impression given to the market that
the loan had actually been provided (116) and, lastly, by the
dispatch to France Télécom of the loan contract initialled
and signed by ERAP (117). While it is true that the contract
was never signed by France Télécom, this does not mean
that there was no potential commitment of state resources.
In so far as the document constituted a contractual offer
and as long as it was not rescinded, France Télécom could
have signed it at any time, thereby acquiring the right to
obtain immediate payment of the sum of EUR 9 billion.
Inasmuch as it could not be unaware of this, the State
accordingly had to keep at France Télécom's disposal
through ERAP the amount of the corresponding resources.

(197) The Commission must

therefore consider whether the
advantage thus granted to France Télécom satisfies the
prudent private investor
it affects
test and whether
competition and trade between Member States.

(198) The advantage which the measures at issue procured for
France Télécom enabled the Company to mitigate or partly
avoid the
consequences normally flowing from its
unbalanced financial situation. It will be recalled that the
purpose of the State's intervention was explicitly to resolve
the financial crisis while substantially preserving the
integrity of France Télécom's operational structure and its
rate of domestic growth (a purpose which has essentially
been achieved inasmuch as France Télécom has recovered
and at the same time retained the integrity of the group
apart
In so far as the
advantage granted to France Télécom is selective, it is clear
that that advantage would distort competition between
France Télécom and its competitors. It must be concluded
that, in a competitive sector like telecommunications, the
advantages enjoyed by France Télécom distort or threaten
to distort competition to a particularly appreciable extent.

from a few minor disposals).

(199) When state financial aid strengthens the position of an
undertaking compared with other undertakings competing
in intra-Community trade, the latter must be regarded as
affected by that aid (118). Similarly, where a Member State
grants aid to undertakings operating in the service and
distribution industries, it is not necessary for the recipient
undertakings themselves to carry on their business outside
the aid to have an effect on
the Member State for
Community trade (119).

(201) It follows from the above that the measures in question are

likely to affect trade between Member States.

(202) The prudent private investor principle is discussed in
Section 8 as part of the examination of all the declarations
made by the Government during the months preceding the
loan proposal.

8.

PRINCIPLE OF THE PRUDENT PRIVATE INVESTOR

IN A MARKET ECONOMY

(203) As previously mentioned, the Commission would stress
that the notified measures cannot be analysed without
taking into account
the declarations made by the
Government between July and December 2002. The
content of these declarations and the impact they had on
the market show that the State had decided as early as July
to support the Company.

(204) The Commission would point out

first of all

that
Community law recognises in general the importance of
promises and declarations made by the State for the
application of the rules on state aid (121). On 12 July 2002,
Les Échos published an interview with the French Minister
for Economic Affairs and Finance in which the Minister
confirmed more than once that if France Télécom were to
have any financing problems, then the State would take
whatever measures were necessary to overcome them. The
precise wording of the published interview is as follows:

‘You mention market excesses. France Télécom's share
price is highly volatile. You are the majority shareholder
in the company, do you have a message to convey?

We are the majority shareholder, with 55 % of the
capital, there is clearly no question of our “renationalis-
ing” the company, as I have sometimes heard it said. I
feel responsible for the State's financial interests. The
State shareholder will behave like a prudent investor
and if France Télécom were to face any difficulties, then
we would take appropriate steps.

Was the State behaving like a prudent investor when it
let France Télécom get deeper into debt, by moving, for
example, into Germany?

It is not for me to criticise my predecessors. I would
point out that the entire industry was pursuing the
same strategy at the same time. Having said that, the
ideologically motivated retention of a majority holding

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has not made it any easier to internationalise France
its
Télécom, as it has not been able to pay for
acquisitions with shares. Hence the indebtedness.
I
repeat, if France Télécom had any financing problems,
which is not the case today, the State would take
whatever decisions were necessary to overcome them.

You are reviving the rumour of a capital increase…

No, certainly not! I am simply saying that we shall take
appropriate measures when the time comes. If it is
necessary.

…’ (122)

for

for

commitment

(205) The interview has never been disowned by the French
authorities (123). On the contrary, its substance has been
confirmed by successive statements contained in press
releases of the Ministry of Economic Affairs and Finance
dated 13 September, 2 October and 4 December 2002. The
focus became narrower (124) with each subsequent declar-
the detailed
ation, culminating in the indication of
arrangements
to
implementing the
resolve France Télécom's financing problems (amount of
increase and state participation, shareholder
the capital
loan, support
the Company's refinancing capacity
before the recapitalisation) which formed the subject-
matter of France's notification. The first press release of the
Ministry of Economic Affairs and Finance dated 13 Sep-
tember 2002 spells out how the State will participate in the
future increase in France Télécom's capital: ‘The State will
support the plan's implementation and contribute to a very
substantial strengthening of the company's capital base,
according to a timetable and in a manner to be determined
in the light of market conditions’. It adds that ‘Meanwhile,
the State will,
if necessary, take measures to spare the
company any financing problems’. The same remarks are
made in the press release of the Ministry of Economic
‘The State will
Affairs and Finance of 2 October 2002:
assist in the implementation of the recovery measures and
will contribute to the strengthening of
the company's
capital base in a manner
to be determined in close
collaboration with the company's chairman and board. As
has already been indicated, the State will, if necessary, take
steps in the meantime to prevent the company from being
faced with any financing difficulties’. The press release of 4
December also focuses on these two aspects, namely, the
participation in the capital increase and the refinancing of
the Company through a shareholder loan in the form of a
credit line (125).

(206) Taken as a whole, these declarations may be regarded as
having made public the State's intention whereby, if France
Télécom had any financing problems or financial difficul-
ties,
it, the State, would do whatever was necessary to
overcome them. As will be seen in Section 9, it was already
clear at the time of the first of these declarations that

financial
France Télécom was experiencing structural
difficulties as reflected in its unbalanced balance sheet.
Cash flow generation was proving insufficient to resolve
the debt-related problems. The established inadequacy of
the cash flow and undue optimism about the non-strategic
asset disposals continued to have an impact on France
Télécom's share price and on the rating of its debt (126). By
asserting that the State would take the necessary decisions
or appropriate steps, the Minister was making plain the
State's commitment to doing whatever was necessary to
resolve the Company's structural financing problems. That
was, at any rate, how economic operators saw it.

(207) The question how far these declarations can be attributed
to the State arises only in relation to the July declaration.
The Commission would point out in this connection that,
in the economic context just described, the French financial
newspaper of reference, Les Échos, met with the Minister
responsible and asked him, not how he felt about the
events of the day, but whether he had a message for the
market. The Minister's reply to the journalist was therefore
neither off the cuff nor an analysis of past events. It was,
rather, a reflection of the choice made by the Minister and,
behind him, the Government to send a clear message to
every market player. The Minister was therefore making
precise declarations on behalf of
the State and the
Government (against the background of a series of articles
on the new Government's economic policy priorities). In
such circumstances, the interview given by the Minister is
proof beyond doubt of
the Government's resolve to
support France Télécom and therefore constitutes an act
In any event, as indicated in
imputable to the State.
paragraph 205, the remarks reported in the press were
subsequently neither contradicted or amended by the
Minister nor denied by the Government.

(208) The Commission considers that these public declarations
are sufficiently clear, precise and firm for them to attest to
the existence of a credible commitment on the part of the
State. As far as their publication is concerned, the first
declaration was published in a national daily newspaper
aimed at an audience of business people and financiers.
What is more, the Minister's replies were clearly addressed
not only to the journalist but also to the whole world of
finance and industry. The first question put by the
journalist is highly revealing: ‘France Télécom's share price
is highly volatile. You are the majority shareholder in the
company, do you have a message to convey?’. The Minister
could not therefore have been unaware that he was sending
a message to the Company and its employees as well as to
the Company's other shareholders, banks, creditors and
competitors. The other declarations were, for their part,
published in press releases of the Ministry of Economic
Affairs and Finance intended by their very nature to be
disseminated as widely as possible.

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(209) On the issue of clarity, the Commission considers that as
early as July 2002 the message was clear, although the
State's means of intervention, i.e. the detailed arrangements
for carrying out its commitment, were as yet unspecified: ‘I
feel responsible for the State's financial interests. The State
shareholder will behave like a prudent investor and if
France Télécom were to be in difficulty, then we would take
appropriate steps’ and, a bit later, ‘I am simply saying that
we shall take appropriate measures when the time comes. If
it is necessary’. It is clear from this passage, firstly, that the
State claims to be acting like a prudent majority share-
holder and, secondly, that it will take steps to alleviate
France Télécom's difficulties. The clarity of the majority
can scarcely be doubted
shareholder's
‘I
inasmuch as it is reiterated a few lines further down:
repeat,
if France Télécom had any financing problems,
which is not the case today, the State would take whatever
decisions were necessary to overcome them’. The Commis-
sion would stress that the clarity of the State's commitment
did not diminish with each successive declaration.

commitment

(210) As to the firmness of the commitment, the Commission is
not convinced that the phrases ‘if France Télécom were to
be in difficulty’ or ‘if France Télécom had any financing
problems’ (July declarations) and ‘if necessary’ (September
and October press releases) can be interpreted as provisos
having the effect of suspending the effectiveness of the
State's commitment. At the time of the first declaration,
France Télécom had already seen its credit rating fall
strongly, its debt came to approximately EUR 70 billion,
and the market knew that it had to meet certain important
maturities at the end of 2002/beginning of 2003 and to
cover a substantial financing need before the end of 2003.
The financing problems were therefore not unexpected,
given the general financial context. The situation had not
changed by the time the other declarations were published.
Consequently, the phrases in question cannot be regarded
as conditions precedent when the condition precedent is,
by definition, a future, uncertain event (127). Moreover, the
declarations in question do not contain any reservation as
to prior notification to the Commission. Contrary to what
the French authorities maintain, their assertion that the
State claims
(such a
‘precaution’ was, moreover, simply mentioned in July and
December) cannot be considered a condition precedent to
the State's commitment. There is nothing to show that the
market had knowledge of any such condition. The only
mention of the prudent investor concept is to be found in
the Standard & Poor's press release of 12 July 2002, and
then only as a quotation of the Minister's remarks; the
interpretation of
the Minister's remarks by the agency
which follows the quotation is different (128). Nor is it taken
up by the press releases of other rating agencies such as
Moody's, which in any event
see in the ministerial
declarations an indication of the State's firm commitment
to support France Télécom by whatever means. Affirming

like a prudent

investor

to act

one's intention to behave like a prudent investor is not
enough when it comes to complying with the rules on state
aid, and in particular with the prudent private investor
principle. Otherwise, all Member States would have to do in
order to comply with the rules is maintain that they have
complied with them, and the Commission's monitoring
activity would be entirely superfluous. Moreover, it is not
for the Member States to judge whether the prudent
investor test has been met, but for the Commission under
the watchful eye of the Community courts. Despite what
they maintain, the French authorities do not seem to have
behaved like a prudent investor (see point 5.5). France
Télécom has, moreover, indicated that the phrase ‘appro-
priate steps’ does not mean a priori that the State has
to adopting financial measures. The
committed itself
Commission would stress the clear contradiction in the
French authorities' arguments. On the one hand, the State
maintains that it will behave like a prudent investor. In view
of the Company's financial situation, the financial analyses
and the private shareholder resources, this suggests that the
State intends to give France Télécom financial support (a
change of management could by no means be considered
sufficient, as was subsequently confirmed by the content of
the Ambition 2005 plan). On the other hand, when the
the measures are not
French authorities maintain that
financial, this suggests that they intended to act in their
capacity as a public authority.

the date of

(211) As to the French authorities' argument based on the
Compagnie nationale Air France judgment (129), according
to which the remarks at issue cannot imply a firm and
unconditional commitment on the part of the State as they
are not sufficiently precise, this argument is based on a
confusion between the question of
the
commitment and the assessment of that commitment in
the light of the prudent private investor principle. As far as
the date of the commitment is concerned, the Commission
would point out that the case law does not rule out the
possibility that a firm commitment may exist prior to all
the precise implementing arrangements being known. On
the other hand, what the Court of First Instance of the
European Communities stresses is that a private investor in
general would not take an irrevocable investment decision
as long as the final details of the investment have not been
fixed.

(212) The other relevant circumstances surrounding the said
declarations confirm the clarity and firmness of
the
Minister's message and the will of the State to commit
itself in full knowledge of all the facts. Thus, in July 2002,
the State did not simply issue public declarations; it also
contacted the main market operators in order that they
might act as go-betweens with investors (130). The urgency
due to the Company's financial situation confirms the
existence of a firm decision by the State to support France

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Télécom. During the first half of 2002, France Télécom saw
its credit rating downgraded following publication of its
2001 annual accounts. The lowest point in the down-
grading of France Télécom's credit rating was reached on
24 June 2002 when Moody's downgraded the Company's
rating to just above that of junk bond, thereby making it
very difficult for it to refinance its debt (131). This down-
grading caused considerable concern on the financial
markets about France Télécom's financial situation (and
in particular about its capacity to refinance its EUR 15
billion debt falling due at the end of 2003), and the markets
expected a reaction from the State designed to reassure
them. These circumstances show,
in the Commission's
opinion, that the State had to act urgently to reassure the
market and to prevent any further downgrading of France
Télécom's credit rating to that of junk bond status, as this
would have had a highly negative impact (132) on the
Company's financial situation. The State thus retained this
trust through successive declarations. In fact, the State's
intervention had the effect of preventing any downgrading
of the Company's credit rating to that of junk bond status,
as is, moreover, clearly stated in S & P's press release of
12 July 2002, where the assurances provided by the State
are hailed as being a key factor in France Télécom's not
being reduced to junk bond status.

(213) In conclusion, while each of

these declarations taken
separately might not suffice to prove the existence of a
decision by the State to support France Télécom, taken
together they do seem to suggest that such a decision exists
(being embodied in the offer of the shareholder loan to
France Télécom upfront of the State's participation in a
future recapitalisation). Such was at all events the view
taken by the markets. The firm character of that decision
would be confirmed in the event of its being established
that the declarations are binding under domestic law and
are capable of placing the State's credibility on the line.

(214) First of all,

the Commission has studied the question
whether, under domestic law, a private investor who has
made the same declarations as the State would be obliged to
keep his promises. In view of the fact that, in the present
case, the investor is the State, the study of domestic law also
included administrative law.

(215) The Commission commissioned an expert report on the
subject and it also received several reports from third
parties. On the basis of this information, the Commission
cannot rule out at
the declarations in
this stage that
question may have binding force under French adminis-
trative, civil, commercial and criminal law (133), as well as
under the law of the State of New York.

for concluding that there exists a unilateral commitment in
circumstances such as those of the present case. The fact
that there exists a usable body of case law of the Court of
Cassation (134), of which the French authorities are trying
simply to minimise the scope (135), is incontestable.

(217) It is entirely likely that such repeated and concordant
declarations, emanating as they do from the Minister
responsible for managing the State's shareholdings and
representing the Company's majority shareholder, will be
considered credible by the market, and as a result they
create an expectation on the part of the latter that the State
will do everything necessary to resolve any financial
difficulties that France Télécom may face. Any failure by
the State to fulfil that expectation would have directly
affected its reputation in its capacity as owner, shareholder
or manager of companies, whether quoted or not, and in its
capacity as issuer of bonds to finance the public debt (136).
Thus, the declarations by the French Government, starting
from those of July 2002, are the expression of a strategy
based on the reputation of the State. This strategy consists
in entering into credible commitments in the short and the
long term. A majority shareholder in or an owner of
companies (or, more generally, a manager) who does not
conduct himself in the manner he had publicly announced
and an issuer of bonds who does not keep his word risk
logically, irrespective of any legal obligation, losing their
reputation. This loss of reputation will
involve almost
certain economic costs for the same operator when he tries
to borrow again on the capital markets (assuming he still
finds someone prepared to grant him a loan) or when he
acts as owner or manager of a company (137). In the present
case, the majority shareholder is the French State. The
French State is a major economic operator, active in the
shareholder or, more generally,
economy as owner,
manager of a large number of public undertakings (138). It
is also a major borrower on the capital markets with a view
to financing its public debt (139). A loss of credibility would
therefore have not negligible consequences both for its
reputation as a major economic operator and issuer on the
international markets and for its reputation as a major
political actor.

(218) Taken as a whole, these factors may be deemed to actually
endanger state resources (either by incurring the State's
responsibility vis-à-vis investors, or by increasing the cost of
the State's future transactions). The argument to the effect
that the French authorities' declarations as from July 2002
are aid is therefore innovative, but probably not without
foundation.

(216) The main criticism levelled by the French authorities is that,
under domestic law, unilateral commitments are the
exception, and that letters of intent, which do not form a
homogeneous category, are treated as equivalent
to a
unilateral commitment only in exceptional circumstances.
But the question is not whether French law is unequivocal
on this matter, but whether there is any basis in private law

(219) Nevertheless, the Commission is not of the opinion that it
can establish irrefutably the existence of aid on this basis. It
does, on the other hand, consider that it can demonstrate
the presence of aid elements in a more conventional
manner taking as a basis the December 2002 measures
which were the subject of the notification. In this respect, it
is sufficient to establish that the prior declarations had a

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real impact on the perception of the markets in December,
without having to characterise these prior declarations as
being in themselves state aid.

(220) In the present case,

the market's

reaction and the
comments by financial analysts confirm that the market
regarded these declarations as a credible strategy of
commitment by the State to support France Télécom.

(221) As to the market's reaction, NERA states that the event
study carried out of the announcement of 12 July 2002
shows that that announcement led to an abnormal and not
negligible increase in the value of France Télécom's shares
and bonds. Thus, compared with a set of telecom indexes
representative of the market, France Télécom's share price
rose by between 37,8 % and 43,8 %. The abnormal
increase in bond prices amounted, for its part, to between
3,2 % and 9,7 %. This reaction implies that the market
believed that, by the announcement,
the State was
committing itself
to offering France Télécom greater
support (140) and that the market placed great store by
the announcement. As to the comments by financial
analysts, Deutsche Bank, for example, mentioned several
times in a report published on 22 July 2002 that the State's
support was decisive in preventing a crisis (141) and that the
market was convinced, in the light of the Government's
declarations, of the state support that would be provided by
the Government to France Télécom (142) (even if the market
did query the scope and modalities of that support) (143).
Similarly, S & P considered the Government's declarations
to be credible to the point of influencing the Company's
credit rating. On 12 July, S & P thus downgraded France
Télécom's rating to BBB- but maintained its investment-
grade rating with a stable outlook (144), stating that ‘The
French state — which owns 55 % of France Télécom — has
clearly indicated to Standard & Poor's that it will behave as
an aware investor and would take appropriate steps if
France Télécom were to face any difficulties … Indeed S & P
believes that the company could face certain difficulties
refinancing its debt obligations coming due in 2003.
Nevertheless,
indication underpins France
Télécom's investment-grade credit quality’ (145). The fact
that the State's support, proclaimed as from July 2002, was
credible to the point of enabling France Télécom's credit
investment-grade quality is also
rating to remain at
corroborated by France Télécom itself (146). This evidence
confirms
the French
Government was obliged, in order to keep its reputation
intact on the financial markets, to respect the promises it
had made (there is nothing on file to suggest that this was
not always the Government's intention).

the Commission's opinion that

the State's

investment-grade

declarations helped to restore the financial markets'
confidence (147). In fact, ever since S & P's press release of
13 July 2002, the rating agencies were all agreed that the
support shown by the State since July 2002 was decisive in
maintaining France Télécom's
investment-grade credit
quality. The maintenance of France Télécom's investment-
grade credit quality thus enabled the Company to avoid
additional financial costs (148) on the funds it had already
borrowed owing to the existence of step-up clauses (149) in
some bond issues and on future borrowings. The
rating enabled the
maintenance of
Company, moreover, to put its finances back on to a
sound footing through a recapitalisation operation carried
out under optimum conditions in March/April 2003. Back
in September 2002, one of the conditions imposed by the
banks for their participation in the operation was ‘the
maintenance of at least the current ratings {investment-
grade quality} of the company's long-term debt by the
Moody's and Standard & Poor's rating agencies;
this
condition will be included in the guarantee and investment
contract’ (150). In so far as the shareholder loan is made by
way of an upfront prepayment by the State towards France
Télécom's recapitalisation,
it cannot be
it
examined without regard to the effects of these declara-
tions. A downgrading of France Télécom's credit rating
would have rendered any shareholder loan improbable or
at the very least more costly.

follows that

(223) The Commission would note that, inasmuch as they seek to
show that the shareholder loan taken in isolation and
disregarding the events preceding it satisfies the prudent
investor test, the French authorities' comments might seem
at first sight not to be altogether without foundation.
However, this impression fades after more detailed analysis.
The Commission would stress that, for the reasons given
below, the decision to act upfront of the capital increase
operation by granting a shareholder
loan cannot be
analysed independently of the above-mentioned declara-
tions.

(224) In this connection, the Commission would recall that the
State had declared in July 2002 that it wished to take the
necessary steps to enable the Company to overcome its
financing difficulties. The French authorities remained
vague initially about the arrangements for putting these
declarations into practice. They then fleshed them out in
successive statements by announcing,
in September, the
decision to participate in an operation to strengthen the
capital base, by announcing, in December, the provision to
the Company of a EUR 9 billion credit line, and by putting
in place the necessary conditions for that provision.

(222) The Commission notes that the declarations had a major
impact on the market. A study of the comments and
documents submitted by the French authorities and of the
the State's
available parliamentary debates shows that

(225) The fact that the measures notified in December (including
the decision to act upfront of a future recapitalisation by
granting a shareholder loan), viewed separately, may create

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that

the illusion of perfectly rational transactions does not alter
the fact
the behaviour of economic operators in
December was clearly influenced by the actions and
declarations made by the State beforehand, notably from
July 2002, signalling the State's intention to mitigate the
Company's financing problems. The Commission would
point out in this connection that the State's declarations
were decisive in maintaining the Company's investment-
grade credit quality and that a junk bond rating would have
made the shareholder loan more unlikely and certainly
much more costly.

(226) In this sense, the State's decision to act upfront of the
line
the State's

Company's
ultimately constitutes a concretisation of
announcements.

recapitalisation by granting a credit

(227) The Commission would stress first of all that it is aware
that the operation to recapitalise France Télécom carried
out in April 2003 was a success and that the shareholder
loan was never actually made. It would point out also that,
in applying the prudent private investor test, the Commis-
sion generally enquires whether a prudent private investor
of a size comparable to that of the public investor would
have acted in a similar manner to the public investor.
According to well established case law, the analysis of the
prudent private
is based on the
investor principle
information the investor has at his disposal at the time
he takes his investment decision. The success of
the
operation in March-April 2003 cannot therefore be taken
into account in assessing the State's conduct in December
2002. The Commission would stress, moreover, that, in
applying the concomitance criterion it cannot base the
assessment of the State's conduct on the conduct of other
economic operators in so far as their conduct and the
market were influenced by the State's declarations. The
State's declarations, made in July and then repeated, to the
effect that it would take the necessary steps to enable the
Company to overcome its financing difficulties distort the
concomitance test in so far as private investors cannot be
considered to have made up their minds on the sole basis
of the Company's situation. This holds true irrespective of
whether those declarations contain state aid or not (151).
What is more, the application of the principle of the
prudent private investor in a market economy cannot be
based on the market situation in December, but must
logically be based on the situation of a market unconta-
minated by prior declarations and interventions.

(228) It seems logical, therefore, to examine the decisions in
question from the angle of the situation prior to July 2002.
If the decisions in question are thus analysed in the context
of the situation prior to July 2002, it would appear that
they do not satisfy the prudent private investor test. As
already indicated, in 2002 France Télécom was operating in
a difficult economic context. The debt-reduction plan
announced by the management and centred on a major
assets sale had been judged unworkable by the Moody's
rating agency, which had downgraded the Company's credit
rating by two notches on 24 June 2002 (152). As a result,
France Télécom had then lost the markets' confidence. At
that time, the Government had not yet taken any steps to
improve the Company's operation and results (153) or
the
commissioned any in-depth audit.
Government had not yet appointed a new management
team and no recovery plan was yet in place or even on the
drawing board (154). The support announced by the French
Government beginning with its July 2002 declarations was
therefore in the nature of a unilateral move by the State at a
time when the market was somewhat sceptical about the
Company's capacity to redress its financial situation (155)
and when financial analysts were recommending caution
over participating in a possible operation to strengthen the
Company's capital base (156).

In particular,

(229) In the light of

the Company's financial situation as
described in this Decision, the overall context of loss of
market confidence at the time and the lack of any credible
the
and realistic debt-reduction plan until December,
Commission considers it improbable that a private investor
would, from July 2002, have made declarations similar to
those made by the French Government, likely as they were,
from a purely economic point of view, to seriously place
his credibility and reputation on the line and, from a legal
point of view, to even oblige him from that date to support
the Company financially come what may. In so doing, any
investor would have assumed a very considerable risk vis-à-
vis the Company, without being indemnified by the
Company or
its other shareholders and without any
compensation being envisaged in return for his support.
It is likely that even a reference shareholder in possession of
the same information on the Company's economic
situation as that which the French authorities had at their
disposal at the time (157) would not have taken such a step
without
the
Company's financial situation (158) and taking the measures
necessary to ensure its recovery in order to gain a fairly
precise idea of the risk he was about to take and of the
associated remuneration prospects. Such a reference
shareholder would in any case have needed the financial
markets' help in setting the company to rights, and the
markets did not at that time seem prepared to invest in or
grant much in the way of credit to France Télécom. It is
unlikely that a prudent private investor in the same
position as the French State would, in the light of France
Télécom's economic situation and the unavailability of any
clear, comprehensive information thereon, have made any
declarations of support for the Company in July 2002. It is

first carrying out a thorough audit of

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even less likely that he would have granted a shareholder
loan, taking on himself alone a very substantial financial
risk. The argument advanced by France Télécom and the
French authorities to the effect that ‘it may be objected that
any show of support by the State would have an implicit
guarantee effect in view of the “unlimited” means at the
State's disposal’, which ‘would be tantamount to making it
impossible to apply the principle of the prudent private
investor — whose resources are always limited — and to
treating the conduct of the State shareholder differently
from that of the private investor’ (159), and that this would
prevent any public declaration by the State, cannot be
accepted by the Commission. There is no question of
preventing the State from behaving like a prudent private
investor and making, if necessary, declarations of support
which a prudent private investor would make (such as
declaring its
in a possible
intention to take part
recapitalisation scheme where the operation is based on a
serious and credible recovery plan) or of obliging the State
to notify any declaration. The Commission would point out
that an explicit reservation to the effect that any subsequent
intervention would be notified in advance to the Commis-
sion and implemented only after it had been approved

would render the declarations conditional and would thus
make it possible to examine the subsequent intervention by
the State on the basis of the market situation existing at the
time of its adoption.

(230) It follows from all of the above considerations that the test
of the prudent private investor in a market economy is not
satisfied. Consequently, the advantage conferred on France
Télécom by the proposal to grant a shareholder loan —
the prior declarations and
examined in the light of
interventions of the French authorities — constitutes state
aid, even if
to
calculate.

the advantage is difficult

the scale of

9.

COMPATIBILITY OF THE AID

(231) As to the compatibility of

the aid in question,

the
Commission would point out first of all that its analysis
as set out in paragraphs 122 and 123 of the opening
decision is still applicable in the present case. Consequently,
the aid's compatibility with the common market may be
analysed in accordance with the criteria applied in the
Guidelines.

(232) The Commission would observe that France Télécom was a firm in difficulty within the meaning of the
guidelines, as can be seen from Table 10. More particularly, a firm is regarded as being in difficulty where
‘more than half of its registered capital has disappeared and more than one quarter of that capital has
been lost over the preceding 12 months (160)’.

Table 10

France Télécom

Consolidated balance sheet

(Amounts in EUR million)

(1998 data, EUR 1 = FRF 6,55957)

Financial year ended 31 December

LIABILITIES

2000

2001

2002

Share capital

Additional paid–in capital

Reserves

Group's share of net result

Conversion reserve

Own shares

Shareholders' equity

Minority interests

4 615

24 228

2 748

3 660

59

–2 153

4 615

24 228

4 682

–8 280

844

–5 002

33 157

21 087

2 036

8 101

Non–reimbursable funds and the like

—

—

Long– and medium–term debt

Other long–term liabilities

30 547

5 220

54 543

8 663

4 761

24 750

–5 434

–20 736

3 315

–9 977

9 951

9 780

—

46 898

14 978

Total long–term liabilities

35 767

63 206

61 876

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(Amounts in EUR million)

(1998 data, EUR 1 = FRF 6,55957)

Financial year ended 31 December

LIABILITIES

2000

2001

2002

Current portion of long– and medium–term debt

Bank overdrafts and other short–term borrowings

Trade accounts payable

Accrued expenses and other payables

Other current liabilities

Deferred income taxes

Deferred income

7 542

25 165

7 618

7 729

8 113

512

1 946

1 596

11 365

8 631

7 259

2 481

374

3 258

13 495

10 490

8 503

7 395

1 712

87

3 200

Total current liabilities

58 625

34 964

44 882

Total liabilities

129 585

127 358

106 587

Source: France Télécom Annual Reports 1999, 2002, 2003.

(233) According to the letter of the Guidelines, which refer to the
registered capital, the relevant indicators for the purposes
of characterising France Télécom as a firm in difficulty do
not include all the elements constituting the own capital
but are limited to the share capital and the additional paid-
in capital.

(237) This finding is borne out by an analysis of point 6 of the
signs
Guidelines. This point mentions a number of
illustrating the financial difficulties of a firm. They include
qualitative criteria such as increasing losses, diminishing
turnover, declining cash flow, mounting debt,
rising
interest charges and falling or nil net asset value (161).

(234) On 31 December 2001, according to this definition, the
registered capital came to EUR 28,8 billion (corresponding
to EUR 4,6 billion of share capital plus EUR 24,2 billion of
additional paid-in capital).

(235) On 31 December 2002, the registered capital came to EUR
29,5 billion (corresponding to EUR 4,8 billion of share
capital plus EUR 24,7 billion of additional paid-in capital).
For the 2002 financial year, the group's net loss came to
EUR 20,7 billion, which corresponds to a 70 % loss of
registered capital (EUR 20,7 billion/EUR 29,5 billion). If
account were
reserves of
EUR 8,9 billion, the result would be a loss of the entire
registered capital.

the negative

taken of

(236) Hence it must be concluded that France Télécom was a

firm in difficulty within the meaning of the Guidelines.

(238) As to the French authorities' arguments concerning the
growth in the operational elements, the Commission would
point out that a company's balance sheet, operating results
and future cash flow forecasts are elements forming an
integral part of a company's assessment. The debt in a
company's balance sheet has an effect on its future cash flow
even if it is due to past events. The Commission would
stress that, although it is aware of the growth in the
Company's turnover and of the fact that its cash flow was
both high and growing faster than its turnover, it cannot
ignore the real market position of a company burdened
with a colossal debt. Nor can it dissociate the strategic
decisions
taken by a company from its operational
decisions. Thus, contrary to what the French authorities
the Company's cash flow growth cannot be
maintain,
viewed in isolation. The above-mentioned HSBC report
the
states, moreover,
Company's
for
EUR 21,9 billion in 2004 and 2005; without the TOP
plan, the requirement would be for EUR 33 billion over the
same period.

that, even with the TOP plan,
be
requirement would

financing

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Table 11

France Télécom

Consolidated balance sheet

(Amounts in EUR million)

(1998 data, EUR 1 = FRF 6,55957)

2001

2002

Turnover

Cost of services and products sold

Selling and administrative expenses

Research and development expenses

Operating income/loss before amortisation of fixed assets and
of actuarial adjustments in the early retirement plan (EBITDA)

Operating income/loss (EBIT)

Interest expenses, net (excluding perpetual bonds redeemable for
shares — TDIRA)

Interest expenses on TDIRA

Foreign exchange gain/loss, net

Discounting of early retirement plan

Current income/loss from integrated companies

Other non-operating income (expense), net

Corporation tax

Employee profit-sharing

Net income/loss from integrated companies

Equity in net income/loss of affiliates

Goodwill amortisation

Exceptional goodwill amortisation

Net income/loss of the consolidated group

Minority interests

43 026

(17 619)

(12 520)

(567)

12 320

5 200

(3 847)

—

(337)

(229)

787

(5 904)

2 932

(131)

(2 316)

(890)

(2 531)

(3 257)

(8 994)

714

46 630

(18 558)

(12 579)

(576)

14 917

6 808

(4 041)

—

136

(216)

2 687

(12 849)

(2 499)

(148)

(12 809)

(367)

(2 352)

(5 378)

(20 906)

170

Résultat net (Part du groupe)

(8 280)

(20 736)

Source: Rapports Annuels France Telecom 2001, 2002.

(239) Analysis of the various criteria mentioned in paragraph 237 shows that France Télécom was incurring
growing losses in 2001 and 2002. Moreover, France Télécom's net financial liabilities (see Table 12) came
to EUR 63,5 billion on 31 December 2001, EUR 69,7 billion on 30 June 2002 and EUR 68,0 billion on
31 December 2002.

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Table 12

31.12.2001

30.6.2002

31.12.2002

(EUR billion)

Total long-term liabilities

Current portion of liabilities

Bank overdrafts and other short-term bor-
rowings

Gross liabilities

Marketable securities

Cash

Other long-term liabilities

Net financial liabilities

63,2

1,6

11,4

76,2

(1,1)

(2,9)

(8,7)

63,5

64,3

9,2

13,8

87,3

(0,1)

(2,3)

(15,2)

69,7

Source: France Télécom annual reports and consolidated balance sheets as at 30 June 2002

61,8

13,5

10,5

85,8

(-)

(2,8)

(15,0)

68,0

(240) The Commission would also stress the growth in net
interest expenses from EUR 2 billion in 2000 to EUR
3,8 billion in 2001 and EUR 4 billion in 2002.

(241) The net asset value which corresponds to the share capital
value fell from EUR 33,2 billion on 31 December 2000 to
EUR 21 billion on 31 December 2001 and reached minus
EUR 10 billion on 31 December 2002.

(242) It follows, therefore, that, of the six criteria mentioned in
point 6 of the Guidelines as being signs of a company's
poor health, four are satisfied.

(243) Finally, the Company's financial difficulties are confirmed
by the difficulties it had in 2002 in refinancing itself on
suitable terms on the capital market. Contrary to what the
French authorities maintain, France Télécom did not have
access to the financial markets in 2002 on suitable terms
prior to the series of declarations of support by the State
from July until December of that year (162).

(244) The difficulties which France Télécom would have had in
refinancing itself on suitable terms without the State's
support are illustrated by the financial analysts' reports.

(245) For example, one analyst has stated that, in July 2002, with
a Baa3 rating the Company would have had difficulty
solving its debt problem through the acquisition of new
capital: ‘FT's Baa3 rating meant that it was hard to say who
would buy a potential bond issue. The negative outlook
increases the possibility of the company becoming a fallen
angel, if it is unable to solve its debt problem’ (163).

the State's

(246) A report by JP Morgan dated 2 December 2002 also seems
to confirm that, without
support, France
Télécom would not have been capable of obtaining fresh
capital on the market in order to refinance its debt. The
report states: ‘We continue to view FT's risk/reward profile
as unattractive pending the outcome of a strategy review.
… Although we see significant scope for FT to cut costs
and deliver a compelling yield and even though the CEO
has strong track record execution, the government role in
In the
giving FT the flexibility it requires is pivotal.
meantime, liquidity risk remains and in our view, a right
issue is a matter of when not if. … The government's role
will again be pivotal in refinancing and reducing this debt.
However it is liquidity or refinancing risk that is the near-
term focus of FT and rating agencies alike, with a daunting
refinancing schedule ahead in 2003. […] This would be

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impossible without government intervention — even FT
acknowledged this in its Q3 conference call’
(emphasis
added).

(247) Two reports by Goldman Sachs and SG Equity Research
confirm that it was only after the series of declarations by
the State that the capital market allowed France Télécom to
refinance itself on suitable terms. Global Equity Research
stated on 20 February 2003 that: ‘[the] immediate liquidity
issues are solved: since the government's upfront prepay-
ment of its €15bn equity offering in the form of a €9bn
standby facility, FT has been able to re-access the debt
capital markets to solve its immediate liquidity challenges’.

the time of

(248) The financial analysts' views are borne out by statements by
the Company's then CEO, Mr Bon, as reported in several
press articles (164), and by the French authorities themselves
their December 2002 notification (165).
at
Although the French authorities maintain that the opinion
of France Télécom's former CEO is irrelevant in view of the
circumstances in which it was formulated, it nevertheless
remains that that opinion was borne out by the new CEO
appointed in October 2002 when, at his hearing on
5 December 2002 before the Senate finance committee, he
also stated that the group was in a worrying situation:
‘Despite being faced with huge debts, the company did not
seem to have woken up to the fact that its credit rating was
being downgraded, that it no longer had access to the
capital markets ...’ (166).

(249) Similarly, the documents furnished by the French autho-
rities to illustrate France Télécom's access to the markets are
unconvincing. The exchange offers proposed by […] and
[…] to replace the short-term bonds by longer-term ones
do not bear out the French authorities' argument as to
France Télécom's access to the capital market. The exchange
offer by […], which was dated July 2002 and which is said
to have been made to France Télécom on the 17th of that
month,
thus contains only preliminary remarks on a
possible exchange transaction (167) and mentions only an
indicative price of Euribor + 380 base points and a coupon
of 8,50 % (168). The September 2002 offer by […] was not
signed by the parties and contains no refinancing rate. In
the Commission's opinion, inasmuch as the offers were not
formalised and only one of the two offers mentions an
indicative rate, which was higher than the average of France
Télécom's issue rates in 2002 (169), these two offers are
irrelevant. At all events, the offers seem to postdate the
State's explicit declarations of support of July 2002 and
hence cannot serve as evidence that France Télécom had
normal access to the capital market.

(250) As to the various operations mentioned by the French
authorities (170), and in particular the issuance by France
Télécom of ordinary bonds and mandatory convertible
bonds (‘ORA’) in the course of 2002 (171), the Commission
would point out that they likewise do not prove that France
Télécom had access to the market on suitable terms. The
total amount of the issues is far below (172) the average for
France Télécom over the period 1997-2003 (173). Only the
ORA issue is of any significant size (174), but this is precisely
an instrument that is used where the risk is high and the
cost of an ordinary bond issue would be too great.

this

(251) As to the French authorities' assertion that they preferred to
resort to a syndicated loan than to the bond market for the
purpose of
is not
refinancing France Télécom,
indicative of the Company's capacity to refinance itself on
suitable terms. The syndicated loan to which the French
authorities refer in their comments of 22 January 2004
dates from 14 February 2002, that is to say, from before the
downgrading of France Télécom's credit rating by the rating
agencies. On the other hand, the use for several months of
this short-term credit instrument instead of a longer-term
bond issue which would have made it possible to refinance
part of the Company's debt (175) seems rather to confirm
that France Télécom's access to the capital market was not
easy. This situation was confirmed, moreover, by the French
authorities in their comments of 22 January 2004, when
they stated that recourse to the syndicated loan was less
costly for France Télécom than access to the bond market.

(252) In the light of all the above considerations, the Commission
is of the opinion that France Télécom must be considered,
during the first half of 2002, to have been a firm in
difficulty within the meaning of the Guidelines (176).

(253) However, the measures at issue cannot be characterised as
aid for rescuing and restructuring firms in difficulty as they
do not fulfil the conditions for authorisation laid down in
the Guidelines. The Commission would point out first of all
here that the French authorities have not advanced any
argument along these lines and have never asserted that the
measures at issue had as their purpose the rescuing and
restructuring of France Télécom. On the contrary, the
French authorities have always denied that France Télécom
should be characterised as a firm in difficulty and have
stressed the Company's good operational health.

(254) The measures at issue cannot constitute rescue aid. The
Guidelines provide that the loan must be remunerated,
which is not the case here. Similarly, the aid must be
justified by serious social reasons, but the Commission has
no evidence in its possession to suggest that, in the absence
of such aid, a situation of social distress would have been

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that

seen no evidence to the effect

brought about. In so far as its assets were healthy from an
operational standpoint, had France Télécom been obliged
to dispose of assets to meet its financing requirements there
would in all probability have been no serious social
difficulties. The Guidelines also provide that rescue aid
must be restricted to the amount needed to keep the firm
in business for
the period during which the aid is
authorised. In the present case, however, the Commission
has
the State's
commitment to support France Télécom was limited to
keeping the Company in business. Moreover, the French
authorities have not formally notified the measures in
question as rescue aid, or affirmed that the measures are
aimed at rescuing France Télécom. Rescue aid must be
repaid within 12 months of the date of the last payment;
however, repayment
in France Télécom shares cannot
constitute repayment within the meaning of the Guidelines,
being instead a mere capital
injection as there is no
guarantee that the shares' nominal value will correspond to
the aid amount. The Guidelines provide, furthermore, that
rescue aid may be granted for a maximum period of six
months. Inasmuch, therefore, as the credit line was opened
for a period of 18 months, the period authorised has been
exceeded.

the opening decision,

the Commission cannot consider

(255) Nor can the measures at issue constitute restructuring aid.
In response to a request made by the Commission at the
time of
the French authorities
submitted the Ambition 2005 plan. A perusal of the plan
has confirmed that France Télécom was entering upon a
phase of
in-depth restructuring, both industrially and
financially. The Commission accordingly considers that the
financial measures granted by the French authorities in
support of France Télécom were capable of constituting
restructuring aid within the meaning of the Guidelines.
That being so,
the
measures compatible with the common market under
Article 87(3)(c) of the Treaty and under the Guidelines.
‘aid for restructuring raises
According to the Guidelines,
particular competition concerns’. Consequently, such aid
may be granted ‘only if strict criteria are met, and if it is
certain that any distortions of competition will be offset by
the benefits flowing from the firm's survival … and, where
appropriate, there are adequate compensatory measures in
favour of competitors’. In the present case, however, the
information furnished by the French authorities is silent on
this point, and the authorities have not transmitted to the
Commission certain information referred to in Annex I to
the Guidelines, such as a detailed description of the aid
(proposing compensatory measures) and market studies,
which is essential if the Commission is to be able to rule on
the scale of the distortions of competition involved and
hence of the compensatory measures needed in order to
verify the compatibility of the aid.

10.

RECOVERY OF THE AID

(257) In the light of the above, the shareholder loan of December
2002 constitutes state aid incompatible with the common
market. Article 14 of Regulation (EC) No 659/1999
requires,
the Commission
in principle that
therefore,
should demand its recovery.

the amount of

(258) A precondition for carrying out that obligation is either
that
the aid should be fairly precisely
quantified in the Decision or — if that is not possible —
that
the parameters should be included whereby the
Member State, in cooperation with the Commission, might
subsequently carry out such a calculation.

(259) In this respect, the Commission is not able at this stage to

precisely quantify the aid in question.

(260) While it is true that the analysis based on the market
situation before the July 2002 declarations suggests the
existence of a considerable advantage conferred on France
Télécom, the Commission does not consider it appropriate
to rely on this factor alone in quantifying the aid. Although
reference to the market situation before the July 2002
declarations makes it possible to factor in the effect on the
markets of the prior declarations of the French authorities,
it does not make it possible to isolate that effect from any
other effects of events such as the change of France
Télécom's management or the Ambition 2005 plan. Such
an assessment offers, therefore, only a ‘gross’ view which is
probably not strictly equivalent to the advantage enjoyed
by France Télécom.

(261) Despite all its efforts, the Commission has been unable to
arrive at a reasonable assessment of the notified measures'
‘net’ financial impact, which ought to be established on the
basis of a theoretical calculation isolating the effects of the
declarations and actions attributable to the State from any
other event which may have exerted an influence on France
Télécom's situation or on the perception of that situation
by the markets. Nor does it seem possible to incorporate in
the Decision calculation parameters which are sufficiently
precise to be able to carry out the final calculation during
the Decision's implementing phase.
In these particular
circumstances, respect for the Member State's rights of
defence might constitute an obstacle to recovery pursuant
to Article 14(1) of Regulation (EC) No 659/1999, according
to which ‘the Commission shall not require recovery of the
aid if this would be contrary to a general principle of
Community law’.

(256) The Commission concludes that the financial measures
granted by the French authorities in support of France
Télécom are incompatible with the common market within
the meaning of the Treaty's Article 87(3)(c) and of the
Guidelines.

(262) This conclusion also seems to follow from the principle of
legitimate expectation. Although France has not presented
to the Commission any argument based on the existence of
a legitimate expectation on the part of the aid recipient, it
follows from the case law of the Court of Justice (177) that

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the Commission is required to take automatically into
consideration any exceptional circumstances which justify,
in accordance with Article 14(1) of Regulation (EC)
No 659/1999, its refraining from ordering the recovery
of unlawfully granted aid where such recovery is contrary
to a general principle of Community law, such as respect
for the legitimate expectations of the recipients.

the application of

thereby ruling out

(263) The Commission has taken the Government's declarations
into account in its assessment of the compliance of the
issue with the state aid rules. Viewed in
measure at
isolation, the shareholder loan proposal would probably
have been considered not to constitute aid under the
Treaty. However,
the Commission has come to the
conclusion that the declarations had the effect of restoring
confidence to the market as far as the Company was
concerned,
the
prudent private investor principle and turning the share-
holder loan proposal
into the concretisation of the aid
granted to France Télécom. The Commission recognises
that this is the first time it has had to examine whether this
type of conduct constitutes aid. In so far as the aid depends,
as a result, on conduct which preceded the notification of
the shareholder loan proposal, a diligent operator could
have had confidence in the lawfulness of the conduct of the
Member State concerned, which, for its part, had duly
notified the loan proposal. As Advocate General Darmon
stated in his Opinion in Case C 5/89 (178), ‘the doubts with
which some undertakings may be assailed, when faced with
forms of aid, as to whether notification is
“atypical”
necessary should not be made light of’.

(264) In conclusion, the Commission finds that France Télécom
could legitimately have confidence in France's conduct not

In the light of

the
constituting state aid.
Commission considers that, in the present case, ordering
the aid's recovery would be contrary to the general
principles of Community law.

the above,

11.

CONCLUSIONS

(265) The Commission finds that, placed in the context of the
declarations made from July 2002, the shareholder loan
granted by France to France Télécom in December 2002 in
the form of a EUR 9 billion credit line constitutes state aid,

HAS ADOPTED THIS DECISION:

Article 1

Placed in the context of the declarations made from July 2002,
the shareholder loan granted by France to France Télécom in
December 2002 in the form of a EUR 9 billion credit line
constitutes state aid incompatible with the common market.

Article 2

The aid referred to in Article 1 does not have to be recovered.

Article 3

This Decision is addressed to the French Republic.

Done at Brussels, 2 August 2004

For the Commission

Frederik BOLKESTEIN

Member of the Commission

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Notes

Franc Bonds, its issuer rating and bank loan rating…. any resulting
rating action should not exceed more than one notch’.

(1)

(2)

(3)

(4)

(5)

(6)

(7)

(8)

(9)

(10)

(11)

(12)

OJ C 57, 12.3.2003, p. 5.

See paragraphs 1-8 of the opening decision, which are to be
considered an integral part of this Decision.

See footnote 1.

Party wishing that its identity be kept confidential.

Also called MCI for the purposes of this Decision.

Party wishing that its identity be kept confidential.

To which a complaint
22.1.2003 was annexed.

lodged by the same companies dated

Party wishing that its identity be kept confidential.

LDCOM sent
forwarded to the French authorities on 16.6.2003.

the Commission a corrigendum, which was

The French authorities sent a corrected version of one of the
annexes by email dated 30.7.2003.

2003/S 103-091487.

Party wishing that its identity be kept confidential.

(13) Containing a consultation carried out by Mr Sureau.

(14) Containing three reports prepared by three experts appointed by
France Télécom (Mr C.D. Ehlermann, Mr Y. Galmot and Mr J.
Studzinski of HSBC).

(15)

This letter contains studies the authors of which wish to remain
anonymous. They include an economic study, a study on English
law, a study on American law and a study on French law
concerning the binding force of declarations by the State.

(16) Containing the expert reports described in point 4.13.

(17)

(18)

The State still holds the majority of France Télécom's capital. See
paragraph 60.

Paragraphs 9-12 of the opening decision. According to the 2003
report l'État actionnaire, France Télécom has 240 000 employees in
39 countries.

(19) Hearing of Mr Thierry Breton, France Télécom's CEO, before the
commission of enquiry into the management of public under-
takings, sitting of 4.6.2003.

(20)

‘Credit ratings are used by investors as indications of the likelihood
of repayment in accordance with the terms on which they invested.
Thus, the use of credit ratings defines their function: “investment
grade” ratings (international long-term “AAA” — “BBB” categories;
short-term “F1” — “F3”) indicate a relatively low probability of
default, while those in the “speculative” or “non-investment grade”
categories (international long-term “BB” — “D”; short-term “B” —
“D”) may signal a higher probability of default or that a default has
already occurred’ (Fitch Rating's Internet site: http://www.fitchrat-
ings.com/).

(21) Moody's: ‘Moody's places France Telecom and Orange's long-term
debt ratings on review for downgrade — Approximately EUR 60
billion of Debt Securities Affected… The France Telecom ratings
under review for possible downgrade relate to the following:
Convertible global bonds, Euro MTNs, Eurobonds, Floating Rate
Euro MTNs, Floating Rate French Franc Bonds, French Bonds, Swiss

(22)

(23)

(24)

(25)

‘France Telecom's Long-Term “BBB+” Rating Placed on CreditWatch
Negative; A-2 Rating Affirmed… The action follows news that the
German stock-exchange regulatory authority will
investigate a
possible agreement between France Telecom, the main shareholder
— Gerhard Schmid — of France Telecom's 28,5 % -owned German
associate Mobilcom AG, and a consortium of European banks
regarding the conditions for a change in control of Mobilcom’.

‘Moody's Investors Service has today placed the Prime-2 short-term
rating of France Telecom (FT) on review for possible downgrade as
a result of the rating agency's decision to expand the scope of the
ongoing review of FT. The ongoing review for downgrade of the
Baa1 long-term debt ratings of both FT and Orange plc will
continue. Although Moody's has revised its guidance, indicating
that a downgrade of up to two notches is now possible for the
long-term ratings, the rating agency expects the ratings to remain
investment grade. The review of FT's Prime-2 rating reflects
Moody's increasing concerns about FT's ability to execute its debt
reduction strategy. The rating agency noted that FT's slow progress
in finalising asset sales, coupled with continuing deterioration in
capital market conditions in this sector, could further limit FT's
ability to improve its financial
its debt
reduction targets’.

flexibility and meet

‘Standard & Poor's said today that the ratings on France Telecom
(BBB+/Watch Neg/A-2) remain unchanged, including the group's
short-term corporate credit rating. In its CreditWatch placement of
France Telecom's long-term ratings on March 28, 2002, Standard
& Poor's indicated that any long-term rating downgrade would be
limited to one notch and that its short-term ratings were affirmed.
This indication is still valid today’.

‘… Despite expectations that FT's EBITDA will grow to around €14
billion in 2002, FT's substantial interest and capex requirements
means the company is not expected to generate material free
cashflow for deleveraging in the near term. FT is dependant upon
asset disposals and its treasury stock to make any significant
inroads into reducing its debt:

— Moody's regard FT's ability to reduce debt within a relatively
short period as having become increasingly constrained by
the fall in its equity value, which reduces the potential value
of the treasury stock FT holds, reducing the probability of
conversion of numerous convertible bonds and potentially
implying a lower realizable value for expected non-core asset
disposals, although Moody's acknowledges that it is possible
the positive impact of
this may change. Additionally,
expected asset disposals is expected to be partly offset by
various contingent liabilities adversely impacting upon FT;

— The negative outlook attached to the Baa3 rating reflects the
execution risks associated with FT's high debt refinancing
needs of this highly leveraged company. Although Moody's
does not have any immediate liquidity concerns, the rating
agency notes that FT faces around €15 billion of total long-
term debt maturities in 2003’.

(26)

‘Standard & Poor's said today that it has lowered its long- and
short-term corporate credit ratings on France Telecom (FT) to
triple-“B”/“A-3” from triple-“B”-plus/“A-2”. The downgrade primar-

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20.9.2006

ily reflects Standard & Poor's expectations that FT will acquire the
71,5 % stake it does not already own in German wireless operator
Mobilcom, as well as FT's inability to reduce debt sufficiently and
rapidly enough to maintain credit measures consistent with the
previous ratings. Standard & Poor's also lowered to triple-“B” from
triple-“B”-plus its long-term corporate credit rating on Orange S.A.,
FT's majority-owned wireless subsidiary. The long-term ratings on
both companies remain on CreditWatch with negative implica-
tions, where they were placed on March 28, 2002, reflecting FT's
challenging refinancing needs, including €15 billion of financial
obligations in 2003’.

(35)

(27)

Fitch reduced France Télécom's rating on 5 July 2002 and S & P
reduced it on 12 July. In its 12 July press release, S & P stated that:
‘FT could face certain difficulties refinancing its debt obligations
coming due in 2003’.

(28) Hearing of Mr V. de la Bachelerie, France Télécom's auditor, before
the above-mentioned commission of enquiry: ‘By law, we have to
put into effect the alert procedure as soon as a number of criteria
and indicators appear. The procedure was not applicable before
mid-2002, at which time a signal given out by the market came to
our attention, namely the downgrading of France Télécom's rating.
As part of our auditor's duties, we thus had to deal with the
question within the audit committee and the board of directors,
demanding that board members be provided with a short-term
liquidity plan in order to cope with the “liquidity wall” problem. It
must be said that this constraint appeared at a late stage, in so far as
the company had, up to that time, the means with which to
refinance itself and had, moreover, introduced substantial financing
measures, including jumbos. Consequently, when the liquidity wall
appeared with the downgrading of the rate, we ask for an update of
the cash flow forecasts. At the time of the half-yearly accounts,
which were adopted at the beginning of September 2002 and
finalised at the board meeting on 12 September 2002, a review was
carried out of the liquidity situation in the short term — liquidity
visibility being assessed over the short term, that is to say, less than
a year. The situation, which was by then critical, was made official
in the notes annexed to the financial statements on 30 June 2002’.

(29)

The wording of
reproduced in paragraph 204 below.

the

French Government's declarations

is

(30) Goldman Sachs: ‘FT was on the brink of “junk” status with both

Moody's and S & P's’.

(31) Off Watch; Outlook Stable; Teleconf 3:30PM BST Today, Standard &

Poor's Ratings Direct (12.7.2002)

(32) Hearing of Mr Thierry Breton, France Télécom's CEO, before the
National Assembly's Economic Affairs Committee on 11.12.2002:
‘He pointed out that the financing plan that had been implemented
had not been adhered to and matters had grown worse at the
beginning of 2001 with the result that a liquidity crisis was
foreseeable by the summer of 2003 … Mr Breton stated that,
threatened with a suspension of payments, the company was in a
state of shock … owing to the scale of its debt, as it had to find
enough liquidity to reimburse EUR 15 billion in 2003 and again in
2004, and EUR 20 billion in 2005’.

(33)

(34)

Senate, 21.11.2002, opinion presented on behalf of the Committee
on Economic Affairs and the Plan (1) on the draft Finance Act,
2003, adopted by the National Assembly.

These figures have been taken from the annex to the French
authorities’ letter of 3.12.2002. Even so, on p. 25 of their letter, the
French authorities estimate at EUR 15 billion the amount of
outstanding bonds coming due in 2003. A similar difference is to
be found in the estimate of the amount of bonds coming due by

the end of 2004, which is put at EUR 18,8 billion in Annexe 2 and
at EUR 23,9 billion on p. 20 of the letter.

See the report drawn up on behalf of the commission of enquiry
into the management of public undertakings with a view to
improving the decision-making system, registered at the office of
the President of
the National Assembly on 3.7.2003 (‘the
commission of enquiry report’, or ‘commission of enquiry’ for
short): ‘The commission wished to carry out a precise analysis of
the strategy and procedure with regard to the international
acquisitions engaged in by France Télécom and EDF in view of their
serious consequences for both companies' accounts (in the case of
France Télécom,
the losses attributable to the exceptional
provisions and amortisations relating to acquisitions during the
period 1998-2002 amounted to EUR 28,5 billion for 2001 and
2002). Pretty much the same factors are at play: haste in carrying
out huge acquisitions (in one year, from 1999 to 2000, France
Télécom devoted EUR 65 million to this), insufficient attention to
the economic, political or geopolitical risks, particularly imprudent
financing arrangements … In this climate of disquiet, urgency and
doubt, the company embarked as from 1999 upon an ambitious
and disorganised external growth programme, according priority
to access to the UK and German markets’.

See also the press release of the Ministry of Economic Affairs and
Finance of 5.12.2002:
‘… the company is faced today with an
unbalanced financial structure and a need for own funds and
refinancing in the medium term. This situation is due to the failure
of past investments, which were carried out badly at the peak of
the financial bubble, and, more generally, to the reversal of the
markets. France Télécom's inability to finance its growth other than
through debt has made matters worse’.

(36)

‘According to the information communicated by the French
authorities, this level of indebtedness is due to the fact that, since
1999, France Télécom has undergone very considerable external
growth, which it has financed entirely by borrowing, without
resorting, like its competitors, to mechanisms for increasing capital
or exchanging shares owing to the legal obligation aimed at
ensuring that France Télécom's capital is majority-held by the State.
The French authorities have also referred to the reversal of the
markets, which has led to successive debt plans not being
implemented … In the course of 2000,
the company thus
financed its acquisitions massively on the bond and banking
markets: France Télécom's total long-term loan issues reached €59
billion in 2000-01, and the “€15 G” credit line is itself no more
than the partial refinancing of acquisition financing via bank loans
set up in mid-2000 to the tune of €30 billion ...’ (paragraphs 20
and 21 of the opening decision, unofficial translation).

(37)

France Télécom press release of 5.12.2002, p. 2. See also hearing of
Mr Thierry Breton, France Télécom's CEO, before the Economic
Affairs Committee on 11.12.2002:
‘during the course of 2000,
carried out acquisitions worth a total of EUR 106 billion (purchase
of Orange plc, NTL, Equant, TPSA)’.

(38) Hearing of Mr Thierry Breton, France Télécom's CEO, before the
above-mentioned Economic Affairs Committee meeting: ‘In total,
he observed, out of approximately EUR 100 billion worth of
purchases, 75 was used to develop the strategy in the mobiles
sector, 10 billion being invested in TPSA, 11,2 billion in Mobilcom
and 9 billion in NTL’. See also the report by Goldman Sachs of
26.9.2002, which explained that the debt had been ‘amassed
through a series of transactions in 2000, mainly the acquisition of
Orange and the Mobilcom joint venture’.

(39) Above-mentioned commission of enquiry: ‘In the case of Orange,
which contributed decisively to the explosion of the group's debt’.

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Senate information report No 274, attached to the minutes of the
sitting of 21.2.2002: ‘On 29 May 2000, France Télécom and the
Vodafone group concluded an agreement whereby France Télécom
was to acquire, from Mannesmann, all the shares comprising the
capital of Orange plc,
the British mobile telecommunications
operator. The agreement was executed on 22 August 2000 by the
purchase, by France Télécom, of 664 743 658 Orange shares for
EUR 21,5 billion in cash and the transfer, from Vodafone to France
Télécom, of 544 559 931 Orange shares, paid for by the issue of
129 201 742 France Télécom shares at the price of EUR 140,2
each, with Vodafone agreeing to abstain from exercising the voting
rights attached to those shares. Concomitantly, France Télécom
granted Vodafone a series of sell options on the France Télécom
shares which had been issued to it and Vodafone granted France
Télécom a buy option on all or part of its France Télécom shares.
France Télécom immediately
from Vodafone
15 355 531 France Télécom shares at their issue price, with the
result that Vodafone held no more than 9,9 % of France Télécom's
capital … Following the stock exchange listing of Orange SA on
13 February 2001, Vodafone and France Télécom reached an
agreement on 28 February 2001 on the arrangements for the sale
to France Télécom of the 113,85 million France Télécom shares
still held by Vodafone. This agreement laid down the overall
arrangements for exercising the sell and buy options on the France
Télécom shares held by Vodafone and fixed at approximately EUR
11,63 billion the total price of these shares … The third payment
may be subject to a supplement … The supplement might come to
approximately EUR 1,5 billion ... On the basis of this agreement,
the total cost of acquiring Orange plc comes to EUR 35 472
million’.

repurchased

See also the report of
the above-mentioned commission of
enquiry: ‘The 43,2 billion purchase (reduced to EUR 35,4 billion in
February 2001) was financed half in cash (EUR 21,5 billion) and
half by the exchange of shares (EUR 18,1 billion). On this last
point, however, France Télécom undertook to repurchase the
shares issued at a minimum price of EUR 104. There was scarcely
any doubt that the seller would insist on these repurchase options
being exercised … And, owing to the autumn 2000 stock market
collapse, the risk that the French group might be forced to pay for
Orange wholly in cash materialised, with two payments to
Vodafone of EUR 6,631 billion and EUR 4,973 billion in March
2001 and 2002’.

(40) Commission of enquiry: ‘It was in these difficult circumstances that
the idea of buying into Mobilcom's capital got off the ground …
Evidently, the acquisition of a very large stake was not the subject
of
really in-depth thought despite its being fraught with
considerable risk. … In March 2000, France Télécom thus invested
EUR 3,7 billion in a 28,5 % shareholding, valuing the operator at
80 times its EBITDA (compared with a stock-exchange valuation
before rumours of the deal emerged of the order of 65 times
EBITDA), or a premium of EUR 570 million. This contribution,
which initially took the form of an irrevocable guaranteed loan,
was payable by France Télécom even in the event of failure to
obtain the UMTS licence.

In addition, as part of a cooperation agreement of which your
Rapporteur has become aware, France Télécom undertook to give
Mobilcom, without restriction, the financial support necessitated
by participation in the bidding mechanism and the development of
UMTS activity in Germany ... In return for these commitments, the
risks brought by Mobilcom were considerable. The business plan
drawn up in support of the operation seems to have been highly
imperfect. As regards first of all the development of UMTS, the
price of licences was estimated at EUR 2-3 billion, whereas the

British auction sales in March and April 2000 highlighted the
ongoing licence inflation. In August 2000, the German licences
reached EUR 8,4 billion, and still France Télécom did not think of
withdrawing despite having invested two months earlier EUR 43
billion in the acquisition of Orange (emphasis added) ... It was not
until
two auditing exercises were
launched to look into the German operator's prospects. These
revealed the company's extreme fragility,
its
customer base and the manifest impossibility of obtaining a return
on the investment’.

the summer of 2002 that

the weakness of

their

industrial value was often real,

(41) Commission of enquiry: ‘It should be pointed out, moreover, that,
concurrently with this major acquisitions drive [NTL, Mobilcom,
Orange], France Télécom was also forging ahead with opportunis-
tic acquisitions which were merely peripheral to its international
strategy. Even if
they
needlessly increased the operator's exposure to industrial risks
and added to its financial commitments ... Once again, even if the
investment may have seemed attractive, questions may be asked
about its scale (EUR 7,69 billion, to which must be added EUR 1,5
billion for the repurchase option granted to the other party and an
investment programme worth EUR 6,7 billion over 7 years, which
was, however, supposed to be largely self-financed), at a time when,
owing mainly to the acquisition of Orange, the group's financing
capacity was very largely saturated (with an indebtedness more
than 2,7 times own funds) and when clear signs were appearing of
a stock market crisis ... What is one to think, therefore, of Mr
Michel Bon's statement before your commission on this transac-
tion: “It would have been preferable to call it off, but it was too late
...”’.

The TPSA example is enlightening. The French operator bid for the
historic Polish operator at the time of its privatisation in September
1999.

(42) Commission of enquiry: ‘In July [1999], France Télécom wished to
seize the opportunity of penetrating the British market by
becoming NTL's reference shareholder. The plan had a sound
industrial justification … In all, the French operator committed
EUR 8,122 billion to an investment which, as soon as the Orange
repurchase became a real possibility,
lost almost all strategic
interest and over which, moreover, it had only minority control.
The lack of seriousness with which the management seems to have
analysed the situation does not cease to astound’.

(43)

(44)

(45)

‘The Ministry of Economic Affairs, Finance and Industry denies that
Mr Thierry Breton has accepted the chairmanship of France
Télécom in place of Mr Michel Bon’. Press release of the Minister
for Economic Affairs and Finance of 12.9.2002, Joint Ministerial
Technical Committee.

Press release of the Minister for Economic Affairs and Finance of
13.9.2002, Financial situation of France Télécom.

‘Moody's changes France Télécom and Orange's outlook to stable
from negative and affirms the Baa3 long-term debt ratings and
prime-3 short-term rating’, MOODY'S INVESTORS SERVICES,
13.9.2002. The relevant part of the press release states: ‘Moody's
have taken increased comfort from the government's statement,
which once again confirmed their strong support for FT. Whilst
Moody's concerns regarding the overall level of financial risk and
particularly FT's weak liquidity position remain, Moody's has
the French
grown more comfortable with expectation that
government will act in a supportive manner,
if FT started to
encounter difficulties with its debt repayment schedule’ (emphasis
added).

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(46)

Press release of the Minister for Economic Affairs and Finance of
2.10.2002, France Télécom.

(47)

France Télécom press release of 5.12.2002, p. 1.

(48)

P. 27 of the French authorities' letter of 3.12.2002.

(49)

(50)

Press release of the Minister for Economic Affairs and Finance of
4.12.2002, State support
the action plan approved by France
Télécom's board of directors.

for

See also France Télécom's annual report for 2002:
‘On July 29,
2002, France Télécom issued a bond that is only redeemable in
STMicroelectronics shares at a rate of 6,75 % and for a total
amount of €442 million and maturing on August 6, 2005. The
rates obtained are indexed on those of
the money market,
increased by a margin’.

(51) AFP, 13.12.2003: ‘France Télécom has launched a new stage in its
refinancing plan via the bond market with a EUR 3 billion
debenture issue …. The terms will be known before the end of the
week’.

According to an article in the Financial Times of 15.1.2003: ‘FT will
today settle investor doubt about its cash flow situation in 2003 by
raising €5,5 billion in the bond market … It would now have all
the cash it needs to honour €15 billion of debts that falls due for
repayment this year … FT also faces €35 billion of debt repayments
in 2004 and 2005’.

(52) Research France Télécom, STANDARD & POOR'S RATINGS
DIRECT, 17.12.2002:
‘Since July 2002, support from the French
state has been a key rating factor, underpinning the group's
investment-grade status’. (emphasis added). This statement follows
that of 5 December: ‘Standard & Poor's rating services said today
that it has affirmed its BBB- long term and A-3 short term
corporate credit ratings [on FT] … Since July 2002 Standard &
Poor's has indicated that expected support
from FT's 56 %
shareholder, the French State, is a likely factor underpinning the
group's investment–grade status. The French State's announcement
today that it will immediately grant a €9 billion shareholder loan to
help FT face its 2003 debt obligations is viewed by Standard &
Poor's as strong evidence of this support’
(Standard & Poor's,
5.12.2002) (emphasis added).

to subscribe to a €15 billion capital

(53) Research France Télécom, STANDARD & POOR'S RATINGS
DIRECT, 17.12.2002: ‘The state's December 2002 announcement
that it will grant a €9 billion shareholder loan, coupled with its
commitment
increase,
underscores this support and provides significant credit protection
for FT's debtholders. Although the rights issue's timing has not
been specified yet, FT and the state's targets in this respect meet
Standard & Poor's expectations for the ratings. While market
conditions may challenge the operation, the state's commitment to
subscribe to the equity injection — so as to at least maintain its
stake — strongly mitigates execution risks’.

that

the fact

latter agency took into account (i) the fact that France Télécom was
the largest French fixed and mobile telephony operator; (ii) the
possible privatisation of the Company (‘FT's path from Govern-
ment Entity to Private Corporation’; (iii) in the section entitled
‘the French
‘Government seen As Supportive’,
government has consistently stated its support for FT and its
thereby
willingness to provide financial support
addressing potential
(emphasis added) This
support has been evidenced by ERAP's providing a €9 billion loan
facility to FT, which pays cash interest, but is only repayable in FT's
equity, upon maturity in 18 months time … Moody's factors
government support into the Baaa3 rating’. (emphasis added); and
(iv) in the section entitled ‘Risks/weaknesses’, the fact that ‘the
financial risk of the highly leveraged FT is not commensurate with
investment grade (compensated by strong operational perfor-
mance/implicit support of French government)’. (emphasis added)

liquidity concerns.

required,

if

However, after the capital increase, the factor was no longer taken
into consideration and the credit rating was based clearly on France
Télécom's financial data. For example, on 14 May 2003 S & P
wrote: ‘On May 14, 2003, S & P raised its long and short term
corporate credit ratings on … FT to BBB from BBB- …. The action
follows FT's recent €15 billion rights issue and S & P review of the
new management's business strategy for the group as well as the
debt-reduction potential arising from its plan to boost cash flow
generation during the next three years’.

(55) OJ C 288, 9.10.1999, p. 2.

(56) Commission Decision 2001/89/EC of 23 June 1999 conditionally
approving aid granted by France to Crédit Foncier de France (OJ
L 34, 3.2.2001, p. 36).

(57)

Bouygues Telecom mentions, on page 25 of its comments of
22.1.2003, a judgment of the Court of Cassation, Commercial
Chamber, of 9.7.2002, No 1414 FP-P.

(58) Memo from Mr Sureau dated 14.1.2004.

(59)

The author of which wishes that his identity be kept confidential.

(60)

(61)

Letter dated 22.7.2003 from the Directorate for the Budget,
captioned ‘Listing of the implicit or explicit guarantees granted by
the State’.

Bouygues Telecom also refers, in its comments of 11.4.2003, p. 14,
the support
to the recourse to ERAP in order to carry out
operation and to the various laws concerning it, such as, for
example, the law on the modification of its statutes or the granting
of an explicit guarantee.

(62)

Bouygues Telecom refers to Commission Decision 2000/536/EC of
2 June 1999 concerning state aid granted by Italy to Seleco SpA (OJ
L 227, 7.9.2000, p. 24).

(63) OJ C 71, 11.3.2000, p. 14.

(54)

This factor was still very important to S & P on 17 December
2002. Likewise, it was crucial as far as Moody's was concerned in
February 2003. In its analysis of the Company's fundamentals, the

(64)

See Committee on Finance, the General Economy and the Plan,
record No 26, sitting of 5.12.2002, hearing of Mr Thierry Breton,
France Télécom's CEO.

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(65) Commission Decision 2001/723/EC of 18 July 2001 concerning
the recapitalisation of the company Alitalia (OJ L 271, 12.10.2001,
p. 28).

incoming
alternative networks by increasing the prices of
interconnection and reserving for competitors the benefit of
public subsidies within the framework of
the deployment of
networks in low-profitability areas.

(66) Commission Decision 96/278/EC of 31 January 1996 concerning
the recapitalization of the Iberia company (OJ L 104, 27.7.1996,
p. 25).

(84) Only comments relating to the control of state aid are reproduced

in this Decision.

(67)

(68)

(69)

This figure covers three separate advantages: the increase in France
Télécom's rating when resorting to the bond markets; the savings
made in the absence of any downgrading of the debt, the latter
being dependent on the rating; and the savings made through the
choice of timetable.

98/490/EC: Commission Decision 98/490/EC of 20 May 1998
concerning aid granted by France to the Crédit Lyonnais group, last
paragraph of point 8 (OJ L 221, 8.8.1998, p. 28).

‘A few words from the State by way of a reminder that France
Télécom's risk is ultimately a “quasi-sovereign” risk’, La Tribune,
3.2.2003.

(70)

Point 17 of the Guidelines.

(71) Now known as Neuf Télécom.

(72)

(73)

LDCOM refers to a report by Deutsche Bank dated 22.7.2002.

LDCOM refers to the judgment of the International Court of
Justice, ICJ Reports (1974) 267.

(74) Ministry of Finance press release of 12.9.2002.

(85) Decree No 2002-1409 of 2 December 2002 amending Decree
No 65-1117 of 17 December 1967 organising ERAP adminis-
tratively and financially.

(86) Article 80 of Law No 2002-1576 of 30 December 2002 rectifying

the 2002 Finance Act.

(87)

(88)

(89)

The first memorandum is a study by Yves Galmot dated 7.6.2004,
the second a study by Claus-Dieter Ehlermann dated 1.6.2004, and
the third a study by Michel Jeol accompanied by a memorandum
from Pierre Kirch dated 11.6.2004. The economic report is a report
by HSBC dated 2.6.2004.

The French authorities mention, among other things, bond issues,
credit lines, treasury bills, short-term loans and securitisation and
derivatives operations.

From 26.7.2002 until the presentation of the Ambition 2005 plan
on 4.12.2002, France Télécom made a EUR 70 million bond issue
on 26 July 2002 and issued a fungible tranche of EUR 150 million
with the EUR 3,5 billion debenture loan issued in March 2001.

(*)

Business secret

(90)

See paragraph 39.

(75) Rouen Commercial Court, 10.3.1981, Jurisdata 1982-00382, Soc.

Chapelle Darblay.

(91)

Judgment of
Commission [2002] ECR I-4397.

the Court of

Justice in Case C-482/99 France v

(76)

(77)

Jurisclasseur commercial, redressement et liquidation judiciaires 1995,
section 3110.

the Court of

Judgment of
Justice in Case C-99/98 Austria v
Commission [2001] ECR I-1101. In this case, the press articles did
not have probative force because they emanated neither from the
company concerned nor from the Government.

(78) Comments from LDCOM dated 23.6.2003, p. 23.

(79)

Idem.

(80)

(81)

(82)

(83)

LDCOM provides the following definition of ‘spread’: remuneration
of a loan on the bond market. It corresponds to the difference
between the interest rate paid by an issuer depending on its
characteristics and the reference rate (long-term government
bonds). The level and movement of spreads thus make it possible
to visualise the risks which the markets associate with a given
issuer.

LDCOM observes also that the announcement, in the TOP plan, of
the introduction of a ‘mobility’ objective with a view to promoting
the movement of staff throughout the civil service may contain aid
elements.

the prohibiting of
LDCOM proposes, among other
campaigns to reconquer customers in the voice markets,
the
placing of a ceiling on marketing spending in the voice and high-
speed Internet services markets, and a limiting of the marketing
resources placed at the disposal of Wanadoo.

things:

LDCOM proposes prohibiting the temporal or price squeeze on
unbundling, imposing on Wanadoo an obligation to supply third
increasing the profitability of
parties

retailing,

Internet

for

(92) Comments from the French authorities of 29.7.2003, p. 8. In their
comments of 4.4.2003, the French authorities state that the public
shareholder's investment decision dates from 4.12.2002.

(93)

Judgment of the Court of First Instance in Case T-296/97 Alitalia v
Commission [2000] ECR II-3871.

(94) Commission decision of 18.7.2001, C54/96 and N318/02, ‘Third
instalment of aid for the restructuring of Alitalia approved by the
Commission on 18 July 2001 and new recapitalisation of
€1,4 billion’ (OJ C 239, 4.10.2002, p. 2).

(95)

(96)

(97)

(98)

French authorities' comments of 29.7.2003, p. 27.

See p. 8 of the French authorities' comments of 29.7.2003.

See p. 9 of the French authorities' comments of 29.7.2003.

“in the light of market conditions” is in italics in the French
authorities' comments of 29.7.2003, p. 8.

(99)

See p. 9 of the French authorities' comments of 29.7.2003.

(100)

Ibid. p. 9.

(101) OJ L 83, 27.3.1999, p. 1. Regulation amended by the 2003 Act of

Accession.

(102)

the Court of First

Judgment of
Instance in Case T-358/94
Compagnie nationale Air France v Commission [1996] ECR II-2109.
See also Commission Decision 94/662/EC of 27 July 1994
concerning the subscription by CDC Participations to bonds issued
by Air France (OJ L 258, 6.10.1994, p. 26).

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(103) The principle of the protection of

legitimate expectations is a
general principle of Community law laid down in a long line of
decisions. See, for example, the judgment of the Court of First
Instance of 29 April 2004 in Joined Cases T-236/01, T-239/01, T-
244/01, T-245/01, T-246/01, T-251/01 and T-252/01 Graphite
Electrodes, not yet reported, paragraph 152. See also the judgments
of the Court of First Instance of 9 July 2003 in Cases T-220/00
Cheil Jedang Corp. v Commission, not yet reported, paragraph 33, T-
223/00 Kyowa Hakko Kogyo Co. Ltd v Commission, not yet reported,
paragraph 38 and T-224/00 Archer Daniels Midland Company v
Commission, not yet reported, paragraph 62.

(104)

(105)

Judgment of the Court of Justice in Joined Cases C-329/93, C-62/
95 and C63/95 Germany v Commission [1996] ECR I-5151,
paragraphs 28 and 32.

In the opening decision, the Commission indicated that these
declarations might constitute factors which must be taken into
account. In paragraph 70 of that decision, the Commission made a
general statement (unofficial translation from the original French):
‘It should also be added that an announcement made by the State
of its intention to commit itself might — provided that that
commitment is irrevocable and thereby breeds an expectation and
a feeling of confidence on the part of the market as reflected in an
increase in France Télécom's share price and in the positive
reaction of the rating agencies — already involve the commitment
of state resources’. It then drew a parallel between this assertion
and the facts as set out in the notification by affirming that ‘... The
announcement of
the State's commitment coupled with the
apparent making available of the amount of the loan lead the
Commission to find that the aid might be considered as having
been granted even before an agreement between France Télécom
and ERAP for the provision of the credit line was signed’, and it
pointed out in a footnote that ‘On this point, it will be recalled that
in July and more particularly in September 2002 the market had
already been reassured by the State's support for France Télécom’
the
(footnote 40). Thus, when the procedure was opened,
Commission already indicated that its investigation might also
cover the events of July and September 2002.

(106) See the judgment of the Court of Justice in Case C-75/97 Belgium v

Commission [1999] ECR I-3671, paragraph 25.

(107)

(108)

(109)

(110)

Judgment of the Court of Justice in Case 6/64 Costa v E.N.E.L.
[1964] ECR 1141.

Judgment of the Court of First Instance in Joined Cases T-204/97
and T-270/97 EPAC v Commission [2000] ECR II-2267.

Judgment of the Court of Justice in Case C-323/82 Intermills v
Commission [1984] I-3809, paragraph 31.

Judgment of the Court of First Instance in Case T-67/94 Ladbroke v
Commission [1998] ECR II-1, paragraph 52.

(111) Above-mentioned judgment in Air France.

(112) See, for example, ‘Moody's now expects that a combination of this
facility headroom under the existing EUR 15 billion syndicated
facility and the free cash flow will enable debt maturities of EUR 15
billion to be repaid during the next 12 months.’
(Moody's,
9.12.2002)

(115) Such as the adoption of the law extending the company objects of
ERAP or the adoption of the Amending Finance Act granting ERAP
a EUR 10 billion state guarantee.

(116) ERAP ‘has already made available to France Télécom a shareholder
loan which will be consolidated when the company's capital base is
strengthened’
(Finance Committee, National Assembly, Record
No 28, hearing of Mr Alain Lambert). See also slide 42 of ‘France
Telecom presentation to investors of December 5th, 2002’, where
the French state back-up facility is described as being immediately
available. The market was convinced that the loan was in place. See,
for example, ‘The French State's announcement today that it will
immediately grant a €9 billion shareholder loan …’)
(S & P,
5.12.2002); The confirmation follows FT's announcements that a
EUR 9 billion loan facility has been put in place via ERAP ….)
(Moody's, 9.12.2002).

(117) According to the French authorities, the draft was sent to France
Télécom on 20 December. The draft, however, is undated.

(118)

(119)

Judgment of the Court of Justice in Case 730/79 Philip Morris
[1980] ECR 2671, paragraph 11.

Judgment of
Commission [2002] ECR I-2289.

the Court of

Justice in Case C-310/99 Italy v

(120) For example, France Télécom has set up a joint venture with

Deutsche Telekom and Enel in Italy.

(121) The importance of declarations by the public authorities for
purposes of applying Community law is generally recognised. In a
case involving the encouragement by a State of actions presented in
an official speech by a representative of the Government but
carried out by (legally) independent (but State-controlled) bodies
and having effects contrary to the Treaty, the Court of Justice held:
‘[that] such a practice cannot escape the prohibition laid down by
Article 30 of the Treaty solely because it is not based on decisions
which are binding upon undertakings. Even measures adopted by
the Government of a Member State which do not have binding
effect may be capable of influencing the conduct of traders and
consumers in that State and thus of frustrating the aims of the
Community as set out in Article 2 and enlarged upon in Article 3
of the Treaty’ (Case 249/81 Commission v Ireland [1982] ECR 4005,
paragraph 28). Mention may also be made of the recent judgment
of the Court of Justice in Case C-1/00 Commission v France [2001]
ECR I-9989,
in which the Court punished an infringement
(consisting in failing to comply with a decision) evidenced by a
refusal mentioned in a press release. More particularly as regards
aid, the Court of First Instance has held, for example, that promises
made by public authorities are relevant as regards the criterion
concerning inducement (Case T-126/99 Graphischer Maschinenbau
GmbH v Commission [2002] ECR II-2427).

(122) Les Échos No 18695, France, Friday 12 July 2002, p. 2, France
Télécom interview: ‘We shall take appropriate measures when the
time comes’.

(123) See in this connection the Financial Times article dated 12 May

2004.

(113)

(114)

Judgment in Stardust, cited above, paragraph 36. See also the
judgments of the Court of Justice in Case C-387/92 Banco Exterior
de España [1994] ECR I-877, paragraph 14, and Case C-6/97 Italy v
Commission [1998] ECR I-2981, paragraph 16.

(124) The link between the declarations is shown, for example, by the
phrase ‘as has already been indicated’ in the October 2002 press
release, which refers back to the July and September 2002
declarations.

Judgment of the Court of Justice in Case C-200/97 Ecotrade [1998]
ECR I-7907, paragraph 43 and judgment of the Court of First
Instance in EPAC, cited above, paragraph 80.

(125)

‘3/In the light of the management's action plan and the investment
return prospects, the State will participate in the EUR 15 billion

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strengthening of the company's capital base in proportion to its
share in the capital, giving an investment of EUR 9 billion. The
State shareholder intends to act like a prudent investor.

denied us access to the market’; article in the Financial Times dated
16.9.2002 ‘FT cannot continue to survive when no one wants to
lend us money and, on the contrary, when everyone wants to be
paid on the nail. In the current markets, the refinancing of our debt
is simply out of question’.

It will be for France Télécom to work out the detailed arrangements
and precise timetable for the strengthening of its capital base. The
Government wants the greatest account to be taken during the
operation of
individual shareholders and of
employees with shares in the company.

the situation of

To enable the company to launch a market operation at the most
opportune moment, the State is prepared to make an upfront
prepayment towards the strengthening of the capital base in the
form of a temporary shareholder loan, remunerated at market
rates, placed at France Télécom's disposal’.

(126) See Moody's 24 June press release, referred to above.

(127) See Article 1181 of the French Civil Code, which provides that ‘An
obligation contracted under a condition precedent is one which
depends either on a future and uncertain event, or on an event
having presently happened, but still unknown to the parties’. The
second definition is clearly not relevant in the present case.

(128)

‘Nevertheless the state's indication underpins FT's investment grade
credit quality’. Moreover: ‘F. Mer has ruled out any privatisation of
the group but has clearly pledged the unfailing support of the State,
which owns 54,5 %, in the event of any financing problems. …
One trader has said that this is the first time the Minister for
Finance has expressed himself so clearly on the France Télécom
case. … Everything now turns on the form the State's support
takes’. Factiva, Reuters — 12.7.2002, ‘Stock exchange — FT takes
off after Mer's remarks.’ And:
‘FT's short term risk has been
mitigated by the French government said S & P analyst Guy
Deslondes in a conference call. […] Friday's rating action took into
account S & P's confidence that the French government will help
FT refinance itself, at least for its 2003 obligations. The stable
outlook shows that the rating has bottomed out, added Deslondes’.
‘France Telecom Avoids Liquidity Crisis Thanks To Gvt’. Factiva,
Dow Jones Capital Market Report, 12.7.2002.

(129) Cited above. See also Decision 94/662/EC, referred to above.

(130) The State's direct approaching of the rating agencies shows clearly
that the declarations were the expression of a clearly defined, well
thought-out will. The Standard & Poor's agency states that:
‘The
French State – which owns 55 % of France Telecom — has clearly
indicated to Standard & Poor's that it will behave as an aware
investor and would take appropriate steps if France Telecom were
to face any difficulties’.) France Télécom LT Rating cut to ‘BBB-’; Off
Watch; Outlook Stable; Teleconf 3:30PM BST Today, Standard &
Poor's Ratings Direct, (12.7.2002).

(132) Some even take the view that the Company would not have been
able to find the necessary liquidity on the market in the event of a
downgrading of its credit rating. See, for example, p. 9 of the
above-mentioned report by Goldman Sachs of 22.7.2002:
‘If these
bonds moved from the investment grade segment of the fixed
income market, to “junk”, i.e. high yield, they would swamp the
current European high yield market … [and] we believe it would be
difficult for the existing European investor base alone to absorb all
France Telecom bonds’.

(133) According to a French writer on the subject,

‘There are a
multiplicity of public mechanisms which make it possible to
confer on borrowings a level of guarantee equivalent to that of a
formal loan guarantee: the feature they have in common is that
they increase the risks of uncertainty as to the amount of the
State's commitments to a point where they become indefinite,
without Parliament having performed in their regard its role of
fixing public expenditure in advance’ (A DELION, Les Garanties
D'emprunt des Collectivités Locales et de L'État, Petites Affiches,
17.6.1998 No 72, p. 19).

(134) See Com, 28.3.2000, D. 2000, cah.dr. aff., p. 210.

(135) Through the concept of opposability erga omnes, derived from a
1985 Act. But the question is, firstly, different from that of the
scarcely
the commitment and,
binding nature of
exceptional
since any opposability depends ultimately on a
legislative provision.

secondly,

(136) A bond may be defined as a fixed-interest security by which the
issuer undertakes to pay the lender a fixed capital sum at a specific
time in the future and a series of interest payments; in other words,
it is a promise to pay the capital plus interest on predetermined
dates.

(137) As indicated by NERA:

‘economists and game theorists have
studied extensively the importance and value of reputation. In
almost any economic relationship there is
some degree of
uncertainty regarding the nature of the counter party. However,
very often a party is involved in not a single but a whole series of
is a common
similar transactions over a period of
observation that one or both parties may seek to establish a
reputation for themselves, as this may be beneficial later on’. (David
M. Kreps and Robert Wilson, Reputation and Imperfect Information,
27 JOURNAL OF ECONOMIC THEORY 253-279 (1982)).

time.

It

(131) See statements by France Télécom's previous CEO, Michel Bon,
appearing in the press: article in La Tribune dated 16.9.2002 ‘… the
downgrading is preventing the planned refinancing’; article in Le
Monde dated 16.9.2002 ‘the downgrading at the end of June of the
rating attributed to FT's debt by the Moody's rating agency … has

‘Economists have studied the phenomenon of reputation acquisi-
tion rigorously over the past 25 years, and the list of publications
in leading journals is sizeable. Applications of the basic notion to
various fields abound, but we confine ourselves to three examples,

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industrial organization and sovereign debt
i.e. central banking,
markets. … The acquisition of reputation is also important in the
area of (international) borrowing and lending. A sovereign entity,
as well as a private debtor, that fails to pay back a loan will find it
difficult to attract new funding in the future. That is why countries
sometimes seem to prefer an economic downturn, with all
its
hardships, to a situation of default’. (Jeremy Bulow and Kenneth
Rogoff, Sovereign Debt:
Is to Forgive to Forget?, 79 AMERICAN
ECONOMIC REVIEW 43-50 (1989)).

Télécom would generate were going to be higher than they would
have been otherwise. Moreover the effect is strongly statistically
significant: it is not the result of random fluctuations in prices …
The market believed that, as a result of the statement, the French
Authorities would offer more support to France Télécom than they
would do in the absence of any costs of non-performance’.

‘In the same vein,
the French government benefits from a
reputation for honouring the commitment it makes regarding its
management of many commercial enterprises, and matters
affecting the fiscal position of the government. It would be very
costly if its word could not be believed in these matters’.

(141) Deutsche Bank France Télécom/Deutsche Telekom Debt Liquidity and

possible solution 22 July 2002, pp. 1, 3, 8.

(138) See the report by the Minister for Economic Affairs, Finance and
Industry entitled L'État actionnaire 2003: ‘On 31 December 2002,
according to the latest available statistics, the State controlled,
directly or indirectly, 1 616 undertakings, including 97 blue chip
companies. These are undertakings with a registered office in
France’ http://www.paris-europlace.net/links/doc062197.htm.

les objectifs,

(139) For more information on this point see La gestion de la dette publique
les instruments et la gestion des risques by
en France:
Christian Esters, École Nationale d'Administration 2000:
‘The
French bond market grew during the 1990s. The share of the bond
market accounted for by treasury bills increased considerably
between 1989 and 1993, remaining thereafter at a level of about
50 %, except in 1995, when the other bond issues on the French
market suffered their second consecutive fall with the result that,
despite their numbers remaining stable in absolute terms, the share
accounted for by treasury bills increased sharply that year … The
long-term increase in the State's share of the bond markets is a
consequence of the reform of public debt management in France
starting in 1986. One of the reforms consisted in changing the
debt's structure: negotiable state securities replaced non-negotiable
debt, leading to the strong increase in the State's share of the bond
market’. http://www.ena.fr/tele/mcil99/master99esters.pdf

(140) NERA: ‘The results of an event study analysing the effect on share
and bond prices of the announcement on 12th July 2002. The
study shows that there is a strong positive effect: as a result of the
statement, market participants believed the cash flows that France

(142) Deutsche Bank report dated 22.7.2002 entitled France Télécom/
Deutsche Telekom Debt Liquidity and possible solution: ‘… on July 12,
2002, S & P … downgraded France Télécom's ratings to BBB- ...
The agency no longer expects France Télécom to hit the 3,5× net
debt/EBITDA target by 2003, but did assign a “stable” outlook to
the low triple B ratings. It seems that the stable outlook is anchored
by “the French state … [which] has clearly indicated to Standard &
Poor's that it will behave as an aware investor and would take
appropriate steps if France Télécom were to face any difficulties.”
… Interestingly, S & P had initially said it was not incorporating
any extraordinary support from the French government into its
rating when it downgraded France Télécom's ratings to BBB in
June. Since then, the agency appears to have taken an about face in
stating that the conclusions of the creditwatch status follows an
analysis of the company's liquidity position through the end of
2003 and a review of the French state's potential involvement in
the French telecommunications market’ (p. 19);
‘France Télécom
benefited from the market's increased confidence that the French
government will in one way or another support the credit’ (p. 20);
‘we cannot ignore the fact that FT is majority owned by the French
State and recent comments from the French finance Ministry have
reassured investor
(page 54)
‘However, as we have consistently mentioned, we expect that the
company will ultimately find all the liquidity it needs via the so-
called “implicit government support”. This could take the form of
banks or the government providing the necessary loans at market
prices’ (p. 21). However ‘what is the market price for, say, 10 bn of
new debt to a BBB- credit? what is the real price for a Euro 10bn of
debt to a company that is not really a BBB- credit, just treaded there
because the government support? … we suspect there is no right
answer to these questions, because if FT was operating in the real
world, it would not be able to refinance without a debt for equity
swap, in our view.’ (p. 33, along the same lines, see p. 54). And
again ‘There have been reports in the press that
the French
government will stand behind France Télécom, implying that it is
willing to be the “lender of last resort” to the company. These
reports have resulted in a significant rally in both bonds and equity
prices, with the equity rallying over 90 % and the bonds 137bp in
two weeks, as nervous shorts covered position.’ (p. 28); ‘It is worth
noting that S & P states on its recent conference call on its
downgrade of FT's credit that, in general, a company generating
free cash flow with debt to EBITDA of four times would qualify as a
BBB- credit, the last investment grade rating. FT current BBB- rating
appears to be based largely on the promise of government support
providing liquidity, rather than on fundamentals’ (p. 30). According

liquidity will be provided’

that

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to Deutsche Bank's calculations, France Télécom's debt/EBITDA
ratio was 4,9 during the second half of 2002 and 5,20 on
31.12.2002.

the management team's inability to reassure the markets, the
French State intervened in September 2002 (point 8).’

(143)

Ibid., ‘Bonds and convertibles suggest that the market is unsure of
the weight of government support’ (p. 3). See also p. 22.

(144) Which indicates that the agency did not expect any subsequent

downgrading.

(145) France Télécom LT Rating cut to ‘BBB-’; Off Watch; Outlook Stable;
Teleconf 3:30PM BST Today, Standard & Poor's Ratings direct, (July
12, 2002). S & P seems to be referring rather to information
supplied by the French Government to the agency itself, but,
according to the understanding which the Commission has of the
file in view of the evidence in its possession, the content of this
information relates substantially to the same commitments as
those contained in the announcements made in public.

(146) Board meeting presentation, France Télécom stock-taking exercise,

December 2002, p. 36.

(147)

In a covering letter accompanying the financial protocol signed by
[…] bank on 12 September 2002 concerning the bank's
commitment in relation to the Company's planned capital increase,
the bank's representative is unambiguous on this point:
‘We feel
that the planned transaction would be difficult under present
conditions and that a favourable reaction by the markets to the
declarations and official statements to be published at the end of
the week will be a key factor in creating the necessary conditions
for carrying out the transaction’.

(148) See FT form 20-F, March 2003, pp. 15-16: ‘a decrease of one notch
in its long term debt rating by S & P's and Moody's would
automatically increase its annual interest expense by approximately
€ 75 million.’

(149) A step-up clause determines an increase in a bond's coupon rate
and in the interest rates on credit lines as the credit rating declines.

(150) Memoranda of understanding signed on 11 and 12 September

2002 between the State and the banks (condition h).

(154) The appointment of a new management team and the launching of
a study to prepare the ground for a new industrial plan would
appear to be the first steps to take in order to regain the market's
confidence (see, for example, the above-mentioned HSBC report,
p. 6: ‘… the normal attitude of a prudent investor when faced with
such a situation is: (i) to re-establish confidence in the company's
future by appointing a management with fresh credibility’. In the
same vein, see the Deutsche Bank study of 22.7.2002, referred to
‘If we assume a management change which would be
above:
necessary for any deal ()… With a new management the equity
story could then perhaps be sold to the markets’, p. 33. During the
meeting with the Commission on 22.1.2003,
the French
authorities explained that their conduct had been comparable to
that of a prudent investor as, before acting, they had awaited: the
change of management, verification of the Company's financial
situation, preparation of the TOP plan, the announcement of the
State's support and of its intention to participate in the operation
to strengthen the Company's capital base, and, lastly, the recovery
the market's confidence. The Commission agrees with the
of
French authorities that these steps are those which any prudent
private investor would have taken before entering into any
commitment to support the Company. However, as shown above,
the Commission has concluded that the State had committed itself
to supporting France Télécom well before any of these steps had
been taken.

(155) As mentioned above,

the rating agencies downgraded France
Télécom's rating during the months of June and July 2002 to just
above that of junk bond, stating in their press release that the
rating would have been lower still had it been based solely on
France Télécom's fundamentals.

(156) See the above-mentioned Deutsche Bank study of 22.7.2002: ‘In
our view the risk reward balance is not currently very attractive for
investors to participate in a capital increase’.

(151) See in this connection the Seleco decision, referred to above,
paragraph 84. See also the Opinion of Advocate General Geelhoed
delivered on 27.9.2001 in Joined Cases C-328/99 and C-399/00
Italy v Commission [2001] ECR I-4035, which states (unofficial
translation):
‘Hence it is conceivable that these private investors
were willing to contribute only after the authorities decided to
grant new aid. The fact that these private investors were then
willing to contribute at the same time is no longer relevant’.

(157)

(152) See point 3.1.1.

(153) See France Télécom's comments contained in Mr Ehlermann's
report of 21.1.2004: ‘… during the first half of 2002, the market
gradually lost confidence in France Télécom's capacity to cope with
its debt and in the management team's ability to solve the problem
(point 7) … once the first half's figures were known and in view of

Information which was considered partial by the above-mentioned
commission of enquiry. See inter alia: ‘The State thus comes across
as being both very present and too often ineffective ... The State has
difficulty in giving public undertakings clear guidelines …
Moreover, the State's means of control are considerably weakened
by the forms taken by external growth,
the
development of subsidiaries. Decisions that are fundamental to
public groups are being taken at
the level of subsidiaries,
something which, owing to their strong identity (Orange or
Equant in the case of France Télécom) and the specific details of
their governance (the number of “direct” representatives of the
State on their boards is small or non-existent, notwithstanding the
State's controlling majority), reduces still further the time available
for and the quality of the information transmitted to the public
shareholder’. According to the commission of enquiry's analysis,
France Télécom's internal malfunctioning was accompanied by a

is to say,

that

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20.9.2006

‘The least that can be said is
bypassing of the State shareholder:
that, between 1999 and 2000, Finance Ministry officials were kept
only very imperfectly informed of the major strategic decisions
taken by the operator ... France Télécom's management seems to
have practised vis-à-vis its majority shareholder a policy of
“selective”, at best incomplete and at worst non-existent, and in
information’, which seems to have
most cases late and partial,
started to improve only in 2002:
‘According to documents
furnished by the Ministry of Finance, the precise content of the
shareholder pact will be known only when it is transmitted to the
Ministry on 19 February 2002 ... the Ministry of Finance asserts
that it had knowledge only in February 2002, after Gerhard
Schmid mentioned its existence in the press, of the letter sent on
18 April 2000 by Mr Michel Bon to Mobilcom in which France
Télécom undertook to place at the German operator's disposal, to
the tune of EUR 10 billion, the financial resources needed to
introduce UMTS … Certain commitments were simply not
mentioned by France Télécom to its majority shareholder … It
was only at the time of settlement of the option in early 2002 that
the State discovered a EUR 950 million commitment.’

See also certain passages from the hearing of Mr Thierry Breton,
France Télécom's CEO, before the Economic Affairs Committee on
11 December 2002, including: ‘To Mr Jean Arthuis, chairman of
the Finance Committee, who questioned him on the responsi-
bilities of the State as shareholder, with reference in particular to its
in the speedy deterioration in France
monitoring function,
in spite of
Télécom's situation, Mr Thierry Breton said that,
undeniable progress,
fully grasped the
modern management rules of internationally quoted companies or
understood that decisions were a matter for management, under
the supervision of the shareholders.’

the State had not yet

In the introduction to its report, the said committee states that ‘…
the “tutelage” exercised over public undertakings is criticised in
two, seemingly contradictory, ways … At one and the same time,
the State shareholder is insufficiently or belatedly informed and
manifestly incapable of exercising effective control over sometimes
questionable strategic decisions … “This luxury of precautions” and
these sometimes
their being
multiplied” lead in reality, as was stressed before your committee
by Mr Francis Mer,
“not … being
controlled”. It cannot but be concluded that, as Mr Elie Cohen
said, “both Crédit Lyonnais and France Télécom were subject to
control by the State,
the Treasury and to
to the tutelage of
monitoring by the Court of Auditors, that is to say, to a whole
series of external controls, which, in the last analysis, failed to
work”’.

to public undertakings

“useless” controls

“by dint of

(158) Which was, in fact, done only in October after the appointment of

Mr Thierry Breton as CEO.

(159) See France Télécom's comments as set out in Mr Ehlermann's

report of 21.1.2004, point 90.

(160) Point 5(a) of the Guidelines.

(161) Mention is made here only of criteria applicable to a company in

the telecommunications sector.

(162) Mr Douste-Blazy, chairman of the commission of enquiry, said:
‘The downgrading of the company's credit rating denied it access to
the bond market and hence compromised its ability to borrow’.
The downgrading to which he is referring is that of May 2002.

(163) Sara Husband, High Yield Report, 1.7.2002.

(164) See the statements by the previous CEO of France Télécom, Michel
Bon, reported in the press: article in La Tribune of 16.9.2002 ‘… the
fall in credit rating is preventing the planned refinancing’; article in
Le Monde of 16.9.2002 ‘the downgrading at the end of June of the
rating for FT's debt by the Moody's rating agency … has denied us

access to the market’; article in the Financial Times of 16.9.2002
‘FT cannot continue to survive when no one wants to lend us
money and, on the contrary, when everyone wants to be paid on
the nail. In the current markets, the refinancing of our debt is
simply out of the question’.

(165) See also the statement by the French authorities: ‘achieving a net
debt reduction and a reconstitution of the company capital [is] a
sine qua non for the ultimate restoration of
the company's
reputation in credit markets …’, p. 26 of the French authorities'
letter of 3.12.2002.

(166) Committee on Finance, the General Economy and the Plan, record
No 26, sitting of 5.12.2002, hearing of Mr Thierry Breton, France
Télécom's CEO. See also hearing of Mr Thierry Breton, France
Télécom's CEO, before the Economic Affairs Committee on
‘[Mr Thierry Breton] Dwelling on the refound
11.12.2002:
confidence, as witnessed by the very good reception accorded to
the EUR 1,5 billion bond issue launched the previous day for the
first time since 2001’.

(167) Barclays' proposal

for an exchange offer:
preliminary thoughts on such a transaction’.

‘We provide below

(168)

Ibid. Indicative pricing of a new 5-year transaction at 380 bp over
Euribor and an estimated coupon at 8,5 %.

(169) See the French authorities' letter of 16.2.2004.

(170) See the French authorities' comments of 4.12.2003, 22.1.2004 and

16.2.2004.

(171) The French authorities refer to five bond issues made between
26.7.2002 and 23.12.2002, worth in the case of the bonds issued
before the announcement of the Ambition 2005 plan (5.12.2002)
a total of EUR 220 million, to which must be added an amount of
EUR 442,2 million corresponding to the issuance of ORA.

(172) Over the period prior to the announcement of the Ambition 2005

plan on 5.12.2002.

(173) The average is EUR 1,5 billion.

(174) EUR 442,2 million.

(175) Such issues were made in December 2002 and January 2003.

(176)

It is worth recalling in this connection certain passages from the
hearing before the commission of enquiry of France Télécom's
auditors:

‘Mr Edouard Salustro: Mr Deputy, allow me to draw attention to
something you know better than anyone else. Before expressing his
opinion on a set of financial data, the auditor asks himself whether
the company is capable of the economically justified pursuit of its
business. It is the first question, a basic principle which he goes on
to state in the accounts. Afterwards, the question no longer arises
... as it has already been answered.

Mr Xavier de Roux: You considered, therefore, that the continua-
tion of the business went without saying.

Mr Edouard Salustro: No! I mean, of course!… I wasn't there!…

Mr Vincent de La Bachelerie: It did not necessarily go without
saying, and we are in fact monitoring …’.

Even clearer on this score is the explanation given by Mr Bon,
France Télécom's former CEO, before the same commission of
enquiry:

‘There is one fundamental point that the black scenario never
included: the fact that access to the capital market was closed off to
us. We had never entertained that possibility because we thought
that the State's presence as majority shareholder would prevent the
market for contemplating France Télécom's bankruptcy without its
even being necessary for the State to voice its support. This view

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was shared by almost all market operators up until the time when
one of the three rating agencies — and one only — decided that
France Télécom was on the verge of insolvency and reviewed its
rating, denying it any market access overnight ... When, in June,
that one rating agency delivered its opinion and we were denied
market access,
I knew that, unable to borrow again, France
Télécom would be in payment difficulties a year later, towards the
end of the first half of 2003’.

See, along the same lines, the HSBC report of 12.6.2004, page 11:
‘all in all, FT was not a firm in difficulty inasmuch as its business

was healthy, but it did suffer from an unsuitable financing structure
with a lack of capital and excessively short debt-refinancing
periods, coupled with a crisis of confidence on the part of the
markets born of the uncertainties to which this state of affairs gave
rise’.

(177) Case 223/85 RSV v Commission [1987] ECR 4617.

(178) Case C-5/89 Commission v Germany [1990] ECR I-3437.