France Telecom withdrew a $40 billion plan to acquire TeliaSonera on Monday, pleasing its own shareholders but casting doubt over the Nordic operator's future.
This tie-up always faced long odds: the French suitor was restricted by its financial targets while analysts say Sweden, a big TeliaSonera shareholder, was wary of selling at too low a price for political reasons.
TeliaSonera shares dropped 10.9 percent on the OMX Helsinki.
Shares in France Telecom, which trades under the Orange brand, jumped 7.2 percent as investors welcomed its decision to avoid a costly deal that offered few savings.
"By pulling out, France Telecom has shown that it is not in the business of getting big at all costs," said Vincent Griffon, analyst at CM-CIC Securities.
But John Davies, analyst at Dresdner Kleinwort, said France Telecom did not suddenly have a big conversion about the deal's logic, only that it was defeated by its inability to pay enough.
"The worry is they'll find some other deal which they can get past the people (targeted)," he said.
No sooner did France Telecom announce its withdrawal than the market begin to think it might set its sights on Dutch operator KPN, whose shares rose 2.5 percent.
France Telecom's indicative cash-and-shares bid, unveiled on June 5, had been swiftly rejected as too low by TeliaSonera's board and by the Swedish government.
The deal-breaker was money.
"Notwithstanding the interest shown in the project, the dialogue opened with the board of directors of TeliaSonera was unable to reach agreement on its financial conditions," France Telecom said in announcing its withdrawal.
It argued a purchase of TeliaSonera was "not essential to the pursuit of its strategy."
Questions in Sweden
The pullout leaves question marks over TeliaSonera's future. Sweden wants to sell its 37.3 percent stake as part of it’s biggest-ever privatization push but it has shown that it will not sell at any price.
Swedish Financial Markets Minister Mats Odell underlined the government's determination to reduce its TeliaSonera stake.
"TeliaSonera is the only big telecoms firm that is for sale. There are interested parties and I am completely convinced that TeliaSonera will be able to play a part in consolidation," Odell told reporters.
But analysts do not see predators waiting to jump in. "There isn't a very long list," said Davies of Dresdner Kleinwort. He said potential buyers would have been flushed out during the France Telecom jockeying.
TeliaSonera Chairman Tom von Weymarn said in a statement the firm had "excellent growth prospects" in its own right.
Prior to the French attempt, many had thought Sweden would sell off TeliaSonera shares via a public listing, as it did for 8 percent of the firm in 2007.
Now, with the share price languishing, analysts say the government is likely to sit tight and wait for the stock to recover. The government has made privatisation a central plank of its strategy and analysts have said it could not afford to be seen to be selling off the holding too cheaply.
Sweden's initial public offering in 2000 of Telia -- which later merged with Finland's Sonera -- ended up losing thousands of Swedish investors money after the shares tumbled during the bursting of the dot-com bubble.
Sweden, analysts say, needed a price that at least matched the IPO terms -- a level closer to 65 Swedish crowns rather than the 54 to 55 area that the French offer represented.
While France Telecom said a merger would have created the world number three in broadband and world number four in mobile, the market saw limited scope for cost savings.
Debt investors welcomed Monday's news.
Five-year credit default swaps for France Telecom narrowed 10 basis points to 103, meaning the cost of insuring 10 million euros of the French firm's debt has fallen 10,000 euros ($15,790) to 103,000.
France Telecom has a target ratio for debt to core earnings (EBITDA) of 2.0 and the company had already indicated a deal could push that ratio to 2.5 this year. France Telecom had $60.6 billion in debt at end-2007, TeliaSonera $5.9 billion.
France Telecom has not revealed the final terms it offered TeliaSonera, but a source close to the company said it was consistent with the debt ceiling the firm has published.
Poul Jessen, analyst at Dankse Bank, said France Telecom had faced the choice either to be acquisitive, as Deutsche Telekom and Vodafone have been, or focus on results.
"They apparently decided to keep focus on the financial returns," Jessen said.
Jessen said any firm that wants to acquire TeliaSonera will need to reach a solution to disputes over associate companies in Russia and Turkey, which could take a long time. "Therefore I don't expect anyone else to come in," he said.