Wrong numbers at France Telecom

WHEN a share price halves, it may just be extraordinarily bad luck. But France Telecom, once at the pinnacle of French industrial achievement, has now halved four times in a row - making it Europe's most prominent telecoms casualty.

FT stock is now worth only 6% of its peak value. In two years, more than e200bn (£130bn) of shareholder value has been destroyed. The management, led by Michel Bon, seems paralysed. In comparison, former British Telecom boss Sir Peter Bonfield looks like a genius. BT shares halved only twice.

The causes of FT's plight are well known. Bon embarked on a wild expansion drive. In the process, he got embroiled with a bunch of gung-ho entrepreneurs - most disastrously Mobilcom's Gerhard Schmid - and shredded his blue-chip balance sheet. Schmid has now been turfed out. But Bon has spent so long ignoring the gravity of the situation that it will be hard to repair his balance sheet. FT's debt is more than e60 billion but its market capitalisation is only e15 billion.

A few months ago it could have got a rescue rights issue away - in the same way BT did when it was in trouble. But Bon insisted there was no need. Now the maths look appalling. Instead, Bon has concocted a type of debt-for-equity swap with Mobilcom's banks. But that does not deal with any of the debt already on his balance sheet, it just stops it ballooning even further. What is more, it will not stop FT's interest bill swelling by a further e300m a year.

With sales of non-core assets behind schedule and cashflow from FT's core business under threat, it is no wonder the share price is being sucked down a plughole.

Solvency worries for life assurers

ONCE upon a time, everyone wanted to get into European life assurance. Now, it seems, everyone wants to get out. The sector has fallen 36% this year, with few investors calling a bottom yet.

Falling markets have battered insurers' assets. British firms, which have a greater proportion of their funds invested in equities, have been particularly hard hit. CGNU has had to cut its dividend and Abbey National has reportedly had to inject £150m into its life business.

At the same time, dropping markets have increased firms' liabilities. How can firms meet guaranteed policies if investment returns continue to fall? This problem did for Equitable Life last year. Now it has raised the spectre of other failures. In Britain, resiliency tests that require an insurer to be able to withstand a 25% market-fall have not helped. To protect themselves, insurers have been forced to sell stocks, sending markets even lower, so creating a vicious circle.

The other half of the problem is that solvency is a very subjective measure. The practice of booking future profits as assets, while allowed by regulators, is just the kind of accounting wizardry guaranteed to rattle investors, especially after Enron.

So far, only HBOS has turned to investors to ask for more equity capital to support growth. Doubtless others will follow. But the solvency of giant assurers like Legal & General, the Prudential and CGNU is not a real worry unless the FTSE 100 drops below 3300 and stays there. If that happens, investors will have bigger worries on their minds.

Profitable offerings

WHO said UK initial public offerings were a bad investment? Despite all the terrible publicity, this spring's crop of IPOs has actually done rather well. Admittedly, the first two - HMV and Detica - are badly under water. But all the other big ones - William Hill, Wood Group, Intertek, even much-maligned Punch - are above their issue prices.

The rises may not be spectacular, ranging between 4% and 12%. But this has been achieved in a falling market. Indeed, on average the FTSE 100 index has fallen 9% since these last four IPOs were launched, giving them an average outperformance of 19%.

What has happened? Initially, those trying to sell were far too greedy, but HMV sellers got a punch on the nose and cut their prices. The good old-fashioned IPO discount is back.

Hugo Dixon is Editor of www.breakingviews.com