Cegetel shapes up as the telecoms Waterloo

Jean-Rene Fourtou, the chairman of Vivendi Universal, the media giant struggling with a crushing debt mountain, has just turned down a cheque of €6.8bn (£4.3bn) for its stake in a French telecoms business which used to be thought of as non-core. Is this a case of Gallic madness?

Sir Christopher Gent, the all-conquering chief executive of Vodafone who was offering Vivendi the money for its 44 per cent stake in Cegetel, is now facing a major set-back.

Not only has Vivendi turned down Vodafone's money – the offer lapsed yesterday – but it is determined to stop the British company from gaining control by buying out the other two shareholders in Cegetel.

Vodafone has offered BT, holder of 26 per cent of Cegetel, €4bn for its holding and has bid €2.3bn for the 15 per cent stake owned by SBC, a US group. Vodafone wants Cegetel for its SFR mobile phone business, which is highly profitable and is the number two operator in France, with 34 per cent market share, behind Orange. With its strong balance sheet, Vodafone could easily finance the deal.

Although Vivendi is in very poor financial health, it has pre-emption rights over the BT and SBC stakes and it is determined to stop Vodafone. The French group's strategy appears to be to go for the BT stake, which would give it control of 70 per cent of Cegetel.

Sir Christopher has ruled out increasing Vodafone's offer to Vivendi. But Vodafone is committed to its offers to SBC and BT no matter what. So Sir Christopher could end up shelling out €2.3bn in cash for SBC's 15 per cent interest but still not be able to run SFR.

Mark James, analyst at Nomura, said: "If Vivendi bids for BT's stake, Vodafone risks having paid over the odds, in our view, for the SBC stake and crucially still not control SFR. Effectively, Vodafone would have paid a control premium but would be left with a minority position. Given that we also believe the Vodafone transaction overvalues Cegetel in any event, this could be the worst of all worlds."

The big winner from this fight is BT, of course, which is getting a huge slug of cash regardless of who wins this Anglo-French contest.

M. Fourtou has now given himself two weeks to come up with the €4bn needed for the BT stake. He has told French union leaders that he has a "two in three" chance of pulling it off.

Vivendi has until 10 December to go to BT with the money to match the Vodafone's offer.

Elisa Perrot of France's CGT union said: "He said he was renegotiating the €3bn loan given by the banks in order to pre-empt."

When M. Fourtou took over the helm at Vivendi from the disgraced Jean-Marie Messier earlier this year, investors thought the company would be a lot duller but much less risky going forward. He was supposed to sell non-core assets to focus on the company's key media businesses and tackle the €19bn debt pile. The last thing investors thought M. Fourtou would do is make a big cash acquisition after the disastrous spending spree of the Messier years.

M. Fourtou's pursuit of Cegetel has not gone down well with some of Vivendi's shareholders and lenders, who are concerned that the troubled company would be increasing debt by buying the BT stake, not reducing it. Moody's, the credit rating agency, downgraded Vivendi further yesterday after it officially rejected the Vodafone offer.

Questions remain over how Vivendi could buy out BT, and the apparent plan to use off balance sheet financing through a special-purpose vehicle has set off alarms bells. Société Générale, one of Vivendi's main lenders, is said to be deeply unhappy.

There are obvious reasons Vivendi is after Cegetel. A Vivendi source said the acquisition of Cegetel would be a "no brainer" if it was not for the debt issues hanging over the company. Vivendi wants to gain control of Cegetel partly because it is regarded as a key strategic asset in France and there is political pressure to retain it. The main draw of Cegetel is SFR's strong earnings, which make up a huge chunk of Vivendi's profits.

Mark Hersee, analyst at Banc of America, said: "Cegetel is the fastest growth asset they have and so, from that point of view, it's the most attractive business."

Vivendi's main media interests are considered to be mature or in decline. Under attack from piracy, the Universal Music business is seeing top-line contraction, while the pay-TV arm Canal Plus is loss-making. The Vivendi Universal film studios are run separately in the United States by Barry Deller, while the company's theme parks have been hit by the economic downturn and the reluctance of Americans to fly in the wake of terrorism.

As well as trying to stitch together more bank financing, Vivendi is desperately making disposals in order to raise the cash for the BT stake. It sold off its European publishing business last week for €1.25bn, less than expected, and last night Vivendi announced the sales of its Houghton Mifflin US publishing arm for €1.75bn.

As for Vodafone, sources at the company defend the decision to wrestle Vivendi for SFR, pointing out that this was probably the best moment to pounce, with Vivendi in severe financial difficulties. France is a gaping hole in the Vodafone portfolio.

Trevor Brignall, a consultant at Cap Gemini Ernst & Young, said: "Mobile operators believe in having global brands and services, with the economies of scale this brings. That's why Vodafone wants SFR so badly."

There have even been suggestions that Sir Christopher may bid for the whole of Vivendi, to get his hands on SFR, and then sell off the rest. This seems to be wild speculation – who'd want to take on the €19bn debt pile?

The head-to-head contest between M. Fourtou and Sir Christopher is in the best traditions of Anglo-French disputes (including the recent spat between Tony Blair and President Jacques Chirac). The outcome is now down to whether the Frenchman can now pull off some pretty fancy financing in the next few days.