France Telecom was on Monday understood to be considering making a bid for Amena, the Spanish mobile telephone operator that has an estimated value of €9bn ($10.8bn) including debt.
The French group's potential return to the acquisition trail comes amid renewed interest in the sector as strategic investors join private equity houses in the search for deals.
Investor confidence is returning as incumbent telecommunications carriers, including France Telecom, start looking outwards again, having spent the past four years repairing balance sheets damaged by excessive expansion.
While it was unclear whether an offer for Amena would emerge, it was understood any bid would probably comprise cash and shares. France Telecom had nearly €50bn of net debt at the end of 2004.
Amena is owned by Auna, which has a separate fixed-line and cable division valued at €2.6bn. The whole Auna group is being auctioned by Merrill Lynch and, if completed, was expected to be the biggest deal in Europe so far this year.
France Telecom had previously ruled itself out of the running after it appeared Auna's shareholders would consider only offers for the whole business.
Merrill Lynch early last week received binding offers for Auna from two competing private equity teams. In one consortium Kohlberg Kravis Roberts, Goldman Sachs's private equity unit and BC Partners made an offer for all of Auna.
The second bid was split into two parts, with a team comprising Blackstone, Carlyle, Providence and Permira vying for Amena alongside a separate bid for the fixed-line assets led by Providence in conjunction with Ono, a Spanish group, and a trio of private equity houses.
France Telecom built up menacing debts between 1999 and 2002. The state's desire to hold more than 50 per cent of the equity was a factor, obliging it to use cash in acquisitions rather than shares. This is no longer an issue, since the state's share has been reduced to 34.9 per cent.
The group stabilised under Thierry Breton, who carried out a €15bn rights issue and began to repay borrowings. After being named French finance minister in February, he was succeeded as chairman and chief executive by Didier Lombard.