France Télécom bullish ahead of earnings forecast

29 Jan 2003

Europe’s most heavily-indebted telecoms company France Télécom (FT) [Paris: FTA.PA] said its pro forma revenues for the year to 31 December 2002 rose by 8.4% to EUR46.6 billion driven by strong performances from its mobile arm Orange, internet division Wanadoo and a 24.9% rise from international operations, including TP SA in Poland which it consolidated on 1 April. The French PTO went on to confidently add that, as a result of its efforts in the fourth quarter, EBITDA for the year would be ‘substantially higher than the market consensus’. Orange Group increased its overall subscriber base to 44.4 million by the end of the year and generated revenues of EUR16.7 billion, up 11.7% year-on-year. FT also said the rate ARPU decline in the UK and France had slowed and network revenues, which form the core of its business, had risen 13.6%. Wanadoo too, posted a strong set of results with turnover leaping by 30.4% to EUR1.5 billion on the strength of 2.5 million net additions in the year to take its customer base to 8.5 million; domestic gains accounted for 1.5 million of the figure, whilst its Spanish ISP eresMas accounted for the remainder. Moreover, Wanadoo said that broadband customers jumped by over 150% to 1.4 million, in turn driving up yearly ARPU.

Despite these positive performances, FT’s traditional fixed line voice and data services business reported a 5.2% decline in turnover to EUR19.7 billion. The fall was attributed to the introduction of competition in the local telephony sector at the beginning of the year, when pre-select customers already using other carriers migrated their business entirely. FT was quick to point out, however, that the negative effect of the development in the local market was smaller than expected and its share of the local market fell only marginally from 82.7% to 80.9%. Nonetheless, the trend is potentially a worrying one for the French giant which does not want to see falling revenues in its traditional market as it struggles to bring down debt. A report from ratings agency Moody’s in late 2002 concluded that in order to counteract a general industry shift of European operators supplanting fixed lines with wireless services (fixed-mobile substitution) and the attendant reduction in the contribution to operating cash flow from the traditional fixed line segment, operators would instead have to focus on fortifying their overall debt protection ratios. However, Moody’s went on to point out that FT’s difficulty in reducing leverage makes it impossible for it to substantially reduce its debt levels in 2003, other than through equity injections.

France Télécom CEO Thierry Breton has already outlined wide-ranging proposals for dealing with the company’s unmanageable debt pile, which stood at EUR69.7 billion as of 30 September 2002. Measures on the table include the sale of assets, such as Dutch cable operator Casema and satellite operator Eutelsat, and a more ruthless stance over divesting subsidiaries that do not fit in with its overall strategic goals. Whilst operations in the UK and France, internet service provider Wanadoo, and its ‘jewel in the crown’ Orange look certain to be retained, assets such as TP SA in Poland and French broadcaster Télédiffusion de France could go if France Télécom secures a good enough offer in today’s deflated market.

France Télécom