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Can Breton Fix France Telecom?

Thierry Breton, who is credited with rescuing Thomson Multimedia, was elected yesterday to take on the daunting task of reducing France Telecom SA’s €70 billion (about $69 billion) debt load and restoring confidence in the crisis-ridden company (see France Telecom Names Chair/CEO).

Breton, 47, certainly has his work cut out for him. Although observers rave that he worked wonders with consumer electronics group Thomson, as well as computer group Bull, sharply reducing costs and increasing revenue, they question whether his magic will work at the helm of one of the most debt-ridden companies in the world.

"Since Breton’s experience with Thomson Multimedia occurred during a boom market, it remains to be seen whether he will be able to cure what ails FT,” writes Peter Cohan, an analyst with Peter S. Cohan & Associates, in an email to Light Reading.

But the work Breton did before joining Thomson in 1997 may more accurately describe what he’ll be facing at FT. Before becoming a turnaround artist, Breton authored eight science fiction books. He also worked as a math teacher.

Other analysts applaud the move. “A person with the skill-set to actually fix a company is probably the most difficult to find,” says Frank Dzubeck, president of Communications Network Architects.

Breton will officially resign from Thomson next Tuesday.

Breton’s appointment was no surprise. Breton was tagged as one of the favorites for the position almost as soon as his predecessor, Michel Bon, was forced out on September 12. Bon stepped down after his government-backed international expansion strategy, which included the acquisition of mobile operator Orange Communications SA and other wireless assets, dramatically increased the company’s debt and led to the posting of astronomical losses. The company reported €12.2 billion (about $11.9 billion) in losses for the first half of 2002 (see Bon Voyage to Another CEO).

France Telecom certainly seems to think that Breton will do a better job than his predecessor. He will receive the same salary he had while working at Thomson, €1.57 million, which is about five times more than Bon made while working for the company.

Breton is also reportedly very chummy with both French Prime Minister Jean-Pierre Raffarin and President Jacques Chirac. This is important, since the French government still owns 56.4 percent of the company that until five years ago was a state monopoly.

While the government is limited by EU regulations from stepping in to save its drowning carrier, there are many indications that it is trying to step up its involvement in the running of the company. Bruno Janet, an FT spokesperson today admitted that Breton had been handpicked by the French government, and also conceded that the government was appointing more board members than usual. “It is the government that chose a manager who had proved his worth,” he said.

Having good government relations could certainly make Breton’s job a little easier. While the biggest challenge facing him now is finding the €15 billion the company needs to pay the portion of its debt that comes due in 2003, he is also going to have to tiptoe very carefully around politically explosive issues.

“He has to be very attuned to the government,” Dzubeck says. “He’s a good Mr. Inside to fix things, and a good Mr. Outside to placate the politicians.”

Raffarin, a center-right politician, for instance, needs Breton to succeed if he wants to convince the French public that selling stakes in other state-owned companies is a good idea.

That’s not likely to happen anytime soon. Between 60,000 and 80,000 demonstrators marched on Paris today protesting the government’s privatization program. While the French public may realize that FT is struggling, observers say they still consider the carrier public property, and would balk at any cost-reductions that include massive job-cuts. In addition, about four fifths of the company’s employees in France have civil servant status, which makes them nearly impossible to fire.

While Breton hasn’t announced any of his plans for ameliorating the carrier’s devastating financial situation, and has said that no such plans will probably be released for another two months, industry analysts say that he will have no choice but to cut jobs. The fact that FT’s German counterpart, Deutsche Telekom AG (NYSE: DT), announced yesterday that it would soon slash nearly 30,000 jobs, also points in that direction (see DT's Layoffs: The First of Many?).

This poses substantial problems in France, where obligatory severance pay in the short term often outweighs the long-term operational savings. Frank Dzubeck points out that if FT were to cut the same number of jobs as the number of layoffs Deutsche Telekom announced yesterday, the company could expect to have to shell out something like $15 billion in severance payments.

In addition to layoffs, Breton’s plan is expected to include massive sales of assets. “The question is,” Dzubeck says, “do you pull everything back to France? Do you get rid of Orange? He has no choice but to sell off assets.”

“If Breton is to make progress, he will most likely have to sell FT’s crown jewels to pay down its enormous debt load to make it through its current liquidity crisis,” Cohan writes.

“In the coming weeks I will conduct an in-depth study of the company’s activities,” Breton said in a statement yesterday (see Thierry Takes Helm at France Telecom). “This review will enable us to rapidly define and implement solutions to loosen the financial grip in which France Telecom is now caught and recover the necessary flexibility to pursue a great ambition.”

— Eugénie Larson, Reporter, Light Reading
www.lightreading.com
deer_in_the_light 12/4/2012 | 9:38:16 PM
re: Can Breton Fix France Telecom? Dzubeck is listed in every LR news piece as the respectable expert, he is full of hot air and has NO clues about FT and French laws
cyber_techy 12/4/2012 | 9:38:15 PM
re: Can Breton Fix France Telecom? Dzubeck is listed in every LR news piece as the respectable expert, he is full of hot air and has NO clues about FT and French laws
===============================================

Those who know become engineers, those who don't become analysts
purna 12/4/2012 | 9:38:00 PM
re: Can Breton Fix France Telecom?
Could you explain where this $15 billion figure for severance payments comes from? For 30,000 lay-offs this would amount to $500,000 per layoff i.e. the equivalent of more than 10 years of what I would expect to be an average salary in France Telecom. I think that those matters are serious enough to merit some research before floating fantasy figures.
hyperunner 12/4/2012 | 9:37:59 PM
re: Can Breton Fix France Telecom? One other thing to mention. FT may not even be able to make the layoffs that a normal business decision would dictate. In France when a company tries to cut pay, or make layoffs etc. the employees don't just go out on strike, they march in the streets and cause chaos. I've been on trips to Paris where the whole city is at a standstill because one union decides they don't like a deal. And remember FT is still mostly owned by the government.

Example: Every year you get truck drivers who strike and block the oil refineries. The same day you see massive queues at gas stations and the country soon grinds to a halt. The police show up at the picket lines but can't (or won't) do squat. The strikes never last more than a couple of days because the government just gives in.

Example: A few years back Air France tried to lay off a lot of workers. Strikers actually "invaded" runways...like these people actually allowed by the police to march onto runways WHEN PLANES WERE LANDING !!!!

Example: My Brit friends here in London are always telling me about French farmers...like when they blockaded the ports in N.France where British farm animals are shipped into France. Apparently the French farmers even set light to farm trucks with live animals in them and the French police just stood with their thumbs up their asses.

Example: The Paris Motor Show was just on and there were at least three strikes affecting visitors.

Example: Every time I go to Paris somebody is on strike. Metro, bus drivers, cab drivers, sanitation, firemen, yada yada.

You can bet that some puke who's been working at FT all their life will be pretty motivated to cause as much disruption as possible because they think somehow that it'll make a difference and let them keep their job. I've discussed this kind of thing with French colleagues and I have to tell you it's a different mindset there. They have a very rigid viewpoint that they have some God-given right to a job, and anything the company does to change that is to be fought to the death.

I hope this isn't sounding racist, I also know lots of French folks who have come over to the US and have seen the difference that a free market economy makes. But the old kind of attitude...in the UK they call it a "nanny state attitude", is very, very common in France and other Eu countries. It's fine when there's a boom going on, but right now it's a major disability for them.

When the good times return you can be sure that US companies will think long and hard about investment in places like France. Sure, put a sales office there because it's a market of 60 million consumers, but why risk putting anything other than the bare minimum needed to do business?

Sorry about the rant. I need to get back home for the holidays to readjust to a free market economy :-)

hR.
hyperunner 12/4/2012 | 9:37:59 PM
re: Can Breton Fix France Telecom? The number may not be that far out.

I know from our French HR folks that the real cost to the company for any worker in France is more than double their headline salary. The difference comes in the massive social charges levvied by the government.

So for instance, if an engineer at FT makes $60k, and is laid off then first off she is likely to get at least 1 year of severance, and more likely 2 years. That's $120k to the employee, but then the company has to shell out a further $120k in taxes and stuff.

These numbers may be on the low side - severence in many European countries is based on seniority, so if you get some bureaucrat who's been with FT for a couple hundred years then they get a big payoff.

Given the size of FT and the strength of the unions there are also likely to be pension plans and healthcare schemes that will have to be maintained. The list is endless. This is why US companies who come to Europe tend to set up in the UK, which has employment costs that are much more in line with the US.

Where does the other $250k come from? Not sure, but the cost of site closures is enormous. You claw some of the cost back when you sell the site, but the beancounters may not have subtracted this money from the headline figure because they're counted as fixed assets.

I'm not an authority, but just my 2 cents on how they might have derived the numbers.

hR.
rzerockzeron 12/4/2012 | 9:37:50 PM
re: Can Breton Fix France Telecom? HypeRunner,

although I tend to agree with you the French have a tendency to strike over almost everything, the upside is that they actually better their standard of living by doing so. France is (to my limited knowledge) one of the only countries where the work week is 35 hours, enabling more people to get jobs and make a living and making sure they all go to their families at 6PM. The same can not be said of the "free market economy".

You state your post was a rant, I'm fine with that, but you need to see the upsides to the economic and social system you so quickly laugh at.

Regards,

RZ.
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