Orange's Q2 results overshadowed by huge tax bill

There was good and bad news for Orange this week, after revelations from the operator that it faced a €2.15 billion ($2.84 billion) tax payment overshadowed more positive news that the price war on the French mobile market had begun to stabilise.

Reuters reported that investors knew about the tax case, which stems from differences over how to account for losses at subsidiaries after a simplification of the group's structure in 2005, but analysts told the news agency that they did not expect such a large bill.

"Today's tax fine will have a negative €1.275 billion impact on our sum of the parts [valuation for the group], or around 6 per cent negative impact on the share price," Citigroup analysts wrote in a note, according to Reuters.

Orange, which was known as France Telecom until July 1,, said in a statement that it plans to appeal, and will file a case in the coming days. However, the company will still have to pay €1.952 billion to the tax authorities at the end of July and €190 million in September while the appeal is pending.

Although Orange said it has "maintained a high level of liquidity allowing it to meet these payments now," the news caused Orange shares to drop by 5.6 per cent, reported Bloomberg, sparking concerns of a credit-rating cut.

The tax bombshell somewhat overshadowed the group's better news that the fierce price war on the French mobile market has finally eased, with average revenue per user from mobile stabilising in the second quarter compared to the first quarter, in line with the forecast for the year of -12 per cent.

"There were no bad surprises in the second quarter on mobile prices in France," CFO Gervais Pellissier, according to the Financial Times.

The company also reported that it was able to reduce net debt by €935 million to €29.61 billion by June 30 compared to Dec. 31, 2012.

Group revenue in the second quarter declined by 4.8 per cent to €10.32 billion, with service revenue in France falling 7.5 per cent to €5.01 billion, or 4.7 per cent excluding regulatory effects. Group earnings before interest, tax, depreciation and amortisation were down 8.4 per cent at €3.29 billion, and were largely in line with analyst expectations, the FT reported.

"Against a macro-economic and competitive backdrop that remains difficult in our main markets, these results demonstrate the effectiveness of our strategy both commercially and in terms of reducing our cost structure," said CEO Stéphane Richard.

The operator's total customer base increased by 3.1 per cent year on year to 231.5 million by the end of June, with net mobile contract sales in France at their highest level since the arrival of fourth mobile operator, Iliad's Free Mobile, in early 2012.

Orange said this growth was particularly due to the take-up of low-cost no-contract offers from Sosh and multi-play Orange Open plans that combine fixed broadband, voice and TV services with mobile services.

Multi-play also boosted the operator's development in Spain, where mobile contract customers were up by 9.8 per cent, and the fixed broadband customer base grew by 14.2 per cent.

Orange also said that a planned initial public offering of EE would not take place before next year to allow the UK's first LTE operator and largest mobile group more time to show financial improvements, Reuters added. Orange owns EE together with Deutsche Telekom.

For more:
- see this Orange statement
- see this Reuters article
- see this Bloomberg article
- see this FT article (sub. req.)

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