France Telecom plans heavy investments for future profit

France Telecom (FT) has mapped out a new five-year strategy in reaction to growing shareholder disquiet and the arrival next year of a fourth mobile operator in France.

The company has outlined two distinct phases to its five-year overhaul with the promise that a short-term investment programme, together with cost cutting and asset disposals over the next three years, will see the company return to profits growth in 2014-2015. This later phase would see lower network costs, less impact from regulations and improved co-operation with partners such as Google and Apple.

FT CFO Gervais Pellissier, told Reuters that its home market, where it generates more than half of its revenues and profits, would come under pressure next year when Iliad, the fourth operator in France, launches its 3G services.

However, he expected the joint purchasing agreement the company has with Deutsche Telekom to provide cost savings of around €3 billion through 2015, and that a possible sale of assets outside its home market--where it held minority holdings--would provide a cash injection.

FT CEO Stéphane Richard, said that its investments in Austria, Belgium, Portugal and Switzerland were under consideration, and confirmed that it would return money to shareholders if FT was able to sell assets worth more than €1 billion. Of note, Richard added that the possibility of the company selling some of these stakes was higher than 50 per cent.

Adding more detail to the two-phase plan, FT was reported by the WSJ as aiming to invest around €18.5 billion until 2013 in improving and expanding its networks across the group to cope with increasing smartphone data traffic.

In the second phase, FT said it hoped to see a CAGR of 2.7 per cent, up from 0.6 per cent in the period between 2011 and 2013. This would lead to a CAGR of 3.4 per cent for EBITDA for the 2014-2015 period.

However, some analysts viewed the targets in 2014 as ambitious.

"Given the tough start to 2011 and lingering uncertainty about a new mobile entrant in France in 2012, we are not sure that the medium-term guidance will be correctly appreciated by investors and the market," wrote Benoit Maynard, analyst with the Paris-based investment bank Natixis.

Analyst Jerry Dellis, from the London-based investment bank Jefferies International, said he expected investors to be sceptical, according to Reuters: "In our view France Telecom's long-term growth targets are credible only if you are bullish on sector fundamentals and relaxed about repricing and cannibalisation risks."

For more:
- see this Reuters article
- see this WSJ article (sub. req.)
- see this Bloomberg article
- see this Financial Times article

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