France Tel, KPN solid long-term bets

Fitch Ratings is backing French and Dutch incumbents as stable long term plays after both maintained leading positions in increasingly competitive domestic markets during the second quarter.
 
The ratings firm held France Telecom at an A rating and KPN at BBB+ due to the pair’s dominance of their home fixed and mobile markets in 2Q11, despite noting each firm faces future challenges in the form of pricing pressure and regulation respectively.
 
For France Telecom, the pricing pressure is set to come from the launch of mobile services by rival Free in 2012. Richard Petit, associated director of Fitch’s TMT Group, notes that all operators in the market “have taken pre-emptive steps to protect their market share and reduce Free’s pricing room for maneuver.” The action includes price cuts over the past year and an increase in quad-play offers that Free might struggle to compete with, the firm notes.
 
The flip side in France is broadband pricing, which Petit notes has increased “above the €30 ‘glass ceiling’ set by Free in 2002,” in the past twelve months. He notes France Telecom’s ADSL and fiber offers are “not materially different from the competition.”
 
Fitch’s confidence comes despite France Telecom’s net income fell almost 50% during 1H11 due to slow sales growth. The operator made €1.9 billion during the period, compared to €3.7 billion in 1H10, with only marginal improvement in revenues.
 
In the Netherlands, incumbent KPN is backed due to holding station in the fixed-line market despite tough competition from cable TV carriers, which Petit notes are “increasingly penetrating the triple-play arena.”
 
The carrier’s net profit hit €1 billion during 1H11 – up from €914 million in 1H10 -, however second quarter profit was hit by what chief Eelco Blok called “regulatory headwinds” that resulted in an 11% drop year-on-year to €414 million.
 
Fitch predicts the regulation issues will continue to impact KPN’s earnings for the next two years.

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