France Telecom fights ‘financial noose’
Orange delays 3G
New France Telecom SA chief Thierry Breton has vowed to "loosen the financial noose" that hangs round the neck of the world's most debt-ridden company with an ambitious program of reforms designed to improve its financial performance. Breton said the expansion undertaken by his predecessor was an "acquisition frenzy" that left a "mountain of debt."
However, there are already growls of dissent from the European Union over the plan, that will see the state give the company a short-term loan of €9bn ($9bn), which will eventually be turned into shares when French Telecom raises 15bn euros ($15bn) from a new equity issue.
Even the French government now acknowledges that its ownership of a 55% stake in the company contributed to its current crisis, because 80% of the €100bn($100bn) that it spent on expansion was made in cash to avoid breaching the law that said the French government had to maintain a majority holding in the company.
The French finance ministry said that "if the future strategic interest of the company demands it, the government would not object to the state holding less than the majority of the capital."
Ironically, while the French government was promising this massive dollop of finance, European Union telecommunications ministers were also meeting and agreed not to use state aid as a means to bail out the telecoms industry.
EU Telecoms Commissioner Erkki Liikanen said the European Commission would investigate if there is "a state-aid element" in the $9bn help that the government was giving France Telecom.
The 15+15+15 plan laid out by Breton will see France Telecom raise 15bn in fresh equity, and save €15bn euros from improved operational performance and a further €15bn from refinancing group debt. As it stands, France Telecom must make debt repayments of €15.2bn in 2003, €15bn in 2004 and €20bn in 2005, a total of €50bn.
Edging the company into the modern financial world, Breton has got finance chiefs to provide their interim figures under US GAAP that showed that the loss in the six months to June 30 was €30.9bn euros compared with €12.2bn under French GAAP. The difference was due to depreciation of goodwill for its Equant and Orange operations. Debt under US GAAP was €72bn.
France Telecom warned that figures for the full year will include asset write-downs of between 5.5bn euros and €7bn, with the impairment of Equant's goodwill accounting for €3.5bn to 4.5bn of this figure. It said it is sticking to its forecast that revenue will increase between 8% and 9% this year, earnings at the EBITDA level will be €14.5bn and investments will be less than €8bn.
With unions hostile to the changes, little was said about jobs cuts apart from the 20,000 already due to leave under early retirement packages. However, the cull of executives from the previous era has already begun, with the heads of Orange and internet unit Wanadoo due to leave, and CFO Jean-Louis Vinciguerra heading off to less stressful pastures.
As expected, its Orange SA mobile unit is to delay its 3G rollout, apart from in the UK where competition makes this difficult. This will ensure that capital expenditure up to the end of 2005 will be €3bn less than expected, and with its stronger-than-anticipated revenue growth, Orange is expected to generate cash flow €5bn to 7bn more than expected.
Chief executive Jean-Francois Pontal justified the delay of 3G by saying that its 2.5G platform is exceeding expectations and while 3G will substantially enhance this "the reality is that a stable 3G platform and mass availability of 2.5G/3G handsets at mass market price points continue to be later than expected."
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