The Commission would point out that the analysis under the state aid rules of a State's conduct must be carried out 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 the State's conduct, 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 recommendations.

As is clear from the analysis below, France Télécom was, from June 2002 onwards, a company with serious 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 these accounts showed improved operating results and substantial cash flow generation. Nevertheless, it also pointed up the heavy 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.

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 its balance sheet through balance sheet provisions and asset disposals totalling EUR 27,2 billion (comprising disposals worth EUR 17 billion and exceptional 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.

Telecom Italia stresses that any aid granted to France Télécom is likely to affect competition in the telecommunications 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 loop and the length of time it takes to negotiate interconnection and provisioning agreements.

WorldCom indicates that it shares the Commission's 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 anticompetitive 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).

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 Télécom's commercial and non-commercial activities, full publication of its accounts and a monitoring of its prices.

1. (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 difficulty68(‘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 recapitalisation 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 commitment 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 received an advantage which it would not have obtained under market conditions.
2. (b)

   the measures at issue cannot be considered compatible within the meaning of the Guidelines. Alternatively, 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 Commission's attention to the distortions of competition in the German telecommunications market caused by the aid measures and proposes, by way of compensatory measures within the meaning of the Guidelines, the sale of all or part of France Télécom's subsidiary Orange.

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.

1. (a)

   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 to the Company's recovery. Thus, according to Bouygues Telecom, only the French State could, in view of the Company's critical 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 Telecom's opinion, the following measures satisfy the requirements of Article 87(1) of the Treaty and hence constitute state aid:

   1. (i)

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

   2. (ii)

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

   3. (iii)

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

   4. (iv)

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

   5. (v)

      the measures at issue affect competition;

   6. (vi)

      the measures at issue affect intra-Community trade.

2. (b)

   the measures at issue cannot be considered compatible within the meaning of the Guidelines.

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 a worsening of the operator's financial and economic situation, which an initial savings drive did not succeed in containing.

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.

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 strengthening 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 declarations 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.

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.

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.

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.

Again on this point, Bouygues Telecom states that the guarantee had the effect of enabling France Télécom to gain renewed access to the financial markets. Thus, 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 narrowed after the month of June 2002 and France 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.

Bouygues Telecom states more precisely, in its comments of 11 April 2003, that the announcement and implementation of the state support gave rise to aid at the origin of advantages linked to the shareholder 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.

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.

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.

1. a)
   Unconditional, unlimited commitment: Bouygues Telecom 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 therefore an unlimited guarantee granted to a company which is extraordinarily leveraged and fragile in the short term. In Bouygues Telecom's opinion, 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 guarantees76(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 relate 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.
2. b)

   Terms governing the granting of the shareholder loan: Bouygues Telecom argues that 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 keeping with the principle of a prudent investor 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.

3. c)

   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 recapitalisation on 12 July 2002, i.e. prior to the existence of the Ambition 2005 plan, without knowing France Télécom's exact economic situation, which had become much worse, and without the concomitant participation of private investors. In this connection, Bouygues Telecom stresses the following points:

   • The company's financial situation: Bouygues Telecom stresses that 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 by the rating agencies. This situation was reflected by the statement by Thierry Breton before the Senate finance committee77.
   • Return on the transaction: Bouygues Telecom 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 which a prudent private investor would have been entitled to expect in such circumstances cannot be reliably calculated. Thus, the recapitalisation of France Télécom cannot be compared 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 78 and Iberia cases79. 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 of the Court of Justice of the European 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 company.

   • 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 telecommunications 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 conditions and only a State of the creditworthiness of France could have coped with such uncertainty. It thus points out that the financing of the 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 shareholders 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 concludes that, at all events, a prudent investor whose financial capacity was comparable to that of the French State and who issued such a guarantee would not have inspired much confidence 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 confidence 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 Company's exact economic and financial situation and prior to the drawing-up of the financing plan. Bouygues Telecom points out that the participation 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 Court of Justice, where private investors are 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 authorities' decision to invest is firm and unconditional 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, Bouygues Telecom takes the view that, in 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 investment is higher than the amount of its participation 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.

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. Thus, Orange does not bear the debt linked to its 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 the mobile telecommunications market 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.

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 lessen the impact of its current difficulties. Bouygues Telecom insists also on the fact that the measures at issue 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.

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).

Additionally, Bouygues Telecom maintains that compensatory measures must be adopted for the benefit of the historical operator's competitors in the mobile telecommunications 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.

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 shareholder. The analysis also points out that state 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, the State is 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.

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, it is probable that such declarations would be considered binding either as a unilateral contract or by virtue of the principle of estoppel.

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.

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.

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:

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.

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

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

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.

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 investment to that of an indebted company, e.g. by limiting its overall investment policy to investments the return on investment period of which is less than 12 months in the case of retail activities; (ii) introducing transparent 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.

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.

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.

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

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.

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.

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 state measures (unlimited guarantee, shareholder loan, staff movements) that France Télécom was able to increase its capital by such an amount.

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 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.

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 its rating (LDCOM refers to Moody's assessment of public undertakings). LDCOM further stresses the fact that the credibility of the State is 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.

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 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 for the declarations of support and the prefinancing measures taken by the Government.

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 aid is incompatible with the Guidelines. Tiscalinet maintains that the conditions for the granting of restructuring aid are not met, inter alia because the Ambition 2005 plan does not contain sufficient compensatory 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 and exchange offer concerning Wanadoo's shares of 11 March 2004, had the effect of enabling France Télécom to benefit from fiscal aid which it would not have received without the State's 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.

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 subsidiaries.

D has submitted a document entitled ‘Stage report on the fulfilment of President Jacques Chirac's campaign commitments in the fields of industry, energy, telecommunications 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.’

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.

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 it is normal and usual for the majority shareholder to grant a loan upfront of its participation in the recapitalisation.

The second report focuses on whether the mere announcement 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 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.

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 for improving the operational cash flow) and, on the other, the amount of the operator's debt (level of 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.

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 it is normal practice for 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.

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 return of 25 %, whereas the average rate on the telecommunications market is 9,9 %.

The first memorandum states that the various legal categories under French civil, commercial or administrative law used by the consultant in its analysis of the State's declarations are not relevant to any finding that the ministerial declarations may be capable of creating rights on the part of third parties. More particularly, the 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.

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

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 that the various declarations on which the experts have focused manifestly do not satisfy these conditions. According to Mr Ehlermann, the analysis put 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 its shareholders' declarations — for having violated this alleged “obligation of silence”. The calculation of the aid as carried out by the experts is vitiated, not only by material errors and 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 memorandum'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.

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) and on budgetary procedure. Moreover, the State's responsibility is not incurred and in any event 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 itself, but from the incurrence of responsibility as a result of that act. And the beneficiary of the transfer of state resources is not the company 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.

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 Economic Affairs and Finance did not represent the 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.

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’.

• ‘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 shareholder 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.

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

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 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.

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.

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 adopt any compensatory measures, these should be 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.

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 significant 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 remunerated at market rates. However, in view of the 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.

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.

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).

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.

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.

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 threshold of the year 2003 without resorting to the 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.

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.

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.

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 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.

The French authorities stress, lastly, that 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.

With regard to the application of the prudent private investor principle to the announcement by the State of its anticipated participation in the strengthening of the 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.

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 available of state funds must, in the French authorities' view, be carried out in the light of such private financing.

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 high profitability prospects of the TOP plan, as confirmed by the plan's favourable reception by the market. They maintain, moreover, that, when the investment 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.

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 operational prospects, which demonstrates the State's 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.

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.

The French authorities add that the amount of the recapitalisation is not a relevant factor and that all that matters is whether the operation was rational. At all events, the amount in the present case was not excessive compared with, say, the capital increase in the case of KPN.

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.

As to the repayment of the ERAP loan by the State as announced by the deputy Minister for the Budget in 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.

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

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.

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 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 resolve the Company's 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.

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 logical that 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 announcement 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 connection 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.

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.

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.

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.

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.

The French authorities argue that only the operational measures had an impact on France Télécom's share price. 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 the participation by the State 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 uncertainty 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.

As to movements in France Télécom's spreads, the French authorities state that they cannot be relied upon to 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 concerned: France Télécom's spreads narrowed in July 2002, reflecting the assessment of the telecoms risk independently 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 movements in France Télécom's spreads are linked to trends in the telecommunications sector and that the State's declarations were not a decisive factor.

• They point out ‘first of all that the legal report is based on an erroneous (not to say tendentious) interpretation 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 that it 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’.

• ‘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 mention of any decision being taken. ‘… [W]hile 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’.

• ‘The French authorities have also noted numerous inaccuracies in the reasoning set out in the legal report. The report is 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 the existence of an “unlimited guarantee”, granted by the State to France Télécom, is in any event totally baseless in Community law’. In accordance with the Compagnie nationale Air France judgment116, 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 of an appeal — relates to radically different 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 intent, the French authorities stress that ‘(i) firstly, it is of the essence of the letter of intent that it is addressed to a beneficiary; (ii) secondly, and as an extension of the preceding observation, the effectiveness of the method is dependent on acceptance by the said beneficiary; and (iii), lastly, the scope of the commitment 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 that time able to make a sufficiently accurate 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, this concept 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 administrative 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 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.’‘A state measure, 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’.

• ‘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 consequences 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 and the Member States. ‘It is a principle of Community law that no person may rely even on promises made by a Community institution in the absence of “specific, unconditional and concordant assurances, emanating from authorised, reliable sources, given to him by the administration”’117.

• ‘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’.

• ‘The economic consultant's conclusions have no intrinsic validity inasmuch as they are based exclusively 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’.

• ‘The microeconomic method of the event study used by the economic consultant raises a number of fundamental issues, including the use of the very 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 courts118 regarding valuation, and this despite the fact that the manifest errors committed recently by the markets in assessing the value of telecommunications operators call for, to say the least, serious caution. What is more, the economic consultant is completely ignorant of the specificities 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’.

• ‘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 methodological 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 contradicted by simple, unavoidable tests such as the observation that, over the relevant period, France Télécom's shares and bonds moved in quite a similar way to the securities of its closest comparable competitor, Deutsche Telekom’. The consultant's report can also be criticised for ‘the unjustified 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 indebtedness 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 swaps (‘CDSs’), the cost of 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 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 derived from that increase by shareholders and 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, incompatible with the assessment of the investor criterion, which calls for an ex ante evaluation’.

• ‘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 private investor criterion, thereby confirming the absence of any aid element in the financial measures forming the subject-matter of the Commission's investigation’.