France Telecom may have calmed investors' concerns for the time being by ditching its proposed takeover of TeliaSonera, but the episode has left questions over what the French giant might do next.

 By pushing for a deal focused on increasing scale, in which analysts saw few strategic merits or tangible synergies, France Telecom executives have left many investors anticipating more dealmaking.

"The driving force for France Telecom management is size rather than shareholder value," said Collins Stewart's Mark James.

And another deal remains a possibility. Chief Financial Officer Gervais Pellissier said earlier this month that even if the TeliaSonera deal didn't work out, France Telecom would still look to make a major acquisition in the next two years.

"There is still the risk of FT doing a deal of some kind and this will continue to weigh on investors' minds," said Dresdner Kleinwort analysts in a note to investors.

As a result, the company's stock "will continue to look cheap relative to the sector," the analysts said.

At 1418 GMT, France Telecom shares were trading up 8%, or EUR1.39, to EUR18.84, the biggest percentage gainer in France's benchmark CAC-40 index.

The stock has slumped over 11% in the last three months, though, underperforming a 6% drop in the DJ Stoxx 600 European telecom index.

Where exactly France Telecom's attention will next turn is unclear.

Rob Goyens, an analyst at Dexia, pointed to Egypt-based operator Orascom Telecom Holding as a possibility. Orascom, which has assets in Africa and the Middle East is "a pure-play company on emerging markets," Goyens said.

The prices of such emerging markets businesses may be a deterrent, though.

"The issue for bigger telcos is that all the emerging market targets are trading at nose-bleed valuations," said Collins Stewart's James. "All the future growth is priced in."

Analysts at Citigroup, meanwhile, said that the difficult experience of pursuing TeliaSonera "will encourage FT towards unquoted businesses in Africa and the Middle East."

By walking away from TeliaSonera rather than pursuing a deal at any price, France Telecom showed restraint, analysts said.

That France Telecom "was not sucked into paying more for TeliaSonera" will be seen "as a sign of a rigor previously lacking in many transactions" in which the company has been involved, said Martin Mabbutt, who has a buy rating on France Telecom stock.

 If the company wants to go further in repairing its reputation, it could return some of its stock-piled cash to shareholders.

"We would...greet a buyback announcement at mid-year results positively," the Citigroup analysts said.

However, Collins Stewart's James said he believed the prospect of a special dividend was unlikely with the company focused on external growth.

Source:Dow Jones Newswires