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Orange Rules Out M&A Moves in France, Returns to Growth

Iain Morris
2/21/2018

Orange CEO Stephane Richard has told analysts that he will not initiate any takeover activity in France after failing to acquire rival Bouygues Telecom in 2016, as the French telecom incumbent registered annual sales growth in its domestic market for the first time since 2009.

Richard, who this week secured shareholder support for another four-year term as Orange CEO, said he did not want to repeat the "risky and complex" moves that Orange (NYSE: FTE) made two years ago when it could not reach an agreement with Bouygues Telecom on its proposed €10 billion ($12.3 billion, at today's exchange rate) takeover. (See End of the Bouygues Affair for Orange.)

"What is sure is that we will not trigger anything ourselves because we are not in a position to do that," he said during an earnings call Wednesday morning. "There will not be a new round of Orange-to-Bouygues consolidation. We cannot buy SFR and we cannot buy Free. If something happens it will be between two other players."

With four network operators providing both fixed broadband and mobile services, France is today regarded as one of the most competitive telecom markets in Europe. Some analysts and industry executives believe this makes it ripe for consolidation, notwithstanding any regulatory barriers to merger activity.

Richard's comments come just days after Bouygues was said to have denied speculation that merger discussions involving all four operators had resumed, with earlier reports suggesting that Bouygues could be divided up between Orange, SFR and the Iliad (Euronext: ILD) business that trades under the Free brand.

Despite ruling out any initiating role in future merger activity, Richard said that consolidation would be welcome. "I am in favor of consolidation in France," he said. "All the time there is one player that is suffering and that is not a long-term sustainable situation. We cannot play a role in such consolidation but if we can help facilitate something we will do that."

Richard identified SFR, a part of the Altice group, as the operator that is suffering today. But Orange has had its own share of pain in recent years after Iliad, which started out as a broadband specialist, entered the mobile market with a low-cost offer in early 2012. (See France's Bouygues, Iliad Gain From Bigger Rivals' Pain.)

After adjusting tariffs and increasing investments in network rollout, Orange was gradually able to steady the ship, and its performance in 2017 was marked by encouraging results across various business units.

That included the French market, where sales grew for the first time since 2009, rising 0.6%, to about €18.1 billion ($22.3 billion). Orange also hailed revenue growth in Spain, Belgium and Luxembourg, central Europe and Africa and the Middle East, with overall sales rising 1.2%, to about €41.1 billion ($50.7 billion). (See Orange Hails Africa Recovery, Expects Margin Growth.)

On an adjusted basis, Orange's earnings (before interest, tax, depreciation and amortization) were up 2.2%, to €12.8 billion ($15.8 billion), and are expected to grow at a higher rate this year. Operating cash flow also increased for the first time since 2009, rising 0.8%, to €5.6 billion ($6.9 billion).

Orange's share price was trading up 1.6% at noon in Paris, following publication of the 2017 figures.

Unlike some of Europe's other big telcos, Orange has shied away from spending heavily on TV content, and particularly on rights to screen high-profile sports events. Instead, it has preferred to concentrate on investment in more sophisticated fixed and mobile networks and today boasts one of the most extensive fiber-to-the-home footprints in Europe.

Those investments drove capital expenditure up to about €7.2 billion ($8.9 billion) in 2017 and the figure is expected to hit €7.4 billion ($9.1 billion) this year. Capital intensity, or capex as a percentage of revenues, has risen every year since 2009.

However, despite expectations that Orange will star to roll out 5G services in 2020 or 2021, Orange expects capex to begin falling after 2019. (See Orange's 5G Plan: Definitely, Maybe and Orange Sees 'Peak' Capex in 2018/19, Ups 2017 Guidance and Orange Spain CEO Puts 5G Squeeze on Ericsson, Nokia.)


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Commenting on the 2017 highlights, Richard noted that 26.6 million homes in the Orange footprint are now "connectable" to high-speed broadband and that Orange has 4.7 million fiber customers and 26 million using 4G services across the group.

Executives said that Orange Bank, the mobile banking service that Orange launched in France last November, had attracted about 55,000 customers by the end of 2017 and is on target for about 100,000 by April.

Orange Bank reported net banking income of €73 million ($90 million) last year and an operating loss of €93 million ($115 million). Orange blamed the loss on the integration of banking assets acquired from Groupama -- the bank it bought to support its mobile banking plans -- and on costs incurred in preparing for the launch of Orange Bank. (See Orange Plans Bank Raid With AI, Digital Weapons.)

Despite growth in France, Spain and parts of central Europe, there was a sales decline of 1.4% at Orange Poland, to about €2.7 billion ($3.3 billion), where the operator has been adapting its strategy to focus on "value rather than volumes." (See Orange Targets Polish Turnaround in 2018 and Orange Polska: Fiber Plan Supports 5G Strategy.)

The enterprise unit also registered a 1% drop in sales, to €7.3 billion ($9 billion), because of a decline in the voice business.

— Iain Morris, News Editor, Light Reading

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