Orange Halts Slide in Profitability as Price War Nears End

Apr 29, 2014 8:40 am ET

(Updates with mobile pricing details in eighth paragraph.)

April 29 (Bloomberg) -- Orange SA, France’s largest phone company, halted a decline in profitability by cutting wireless subsidies and labor costs, saying a two-year price war started by discounter Iliad SA is nearing an end.

First-quarter sales dropped 4.6 percent to 9.8 billion euros ($13.6 billion), improving from a contraction of 5.8 percent during the whole of 2013. Earnings before interest, taxes, depreciation and amortization fell 3.4 percent to 3 billion euros, giving the Paris-based carrier a stable profit margin of 30.8 percent during the quarter.

“This quarter is satisfying for us especially as the margin stabilizes,” Finance Chief Gervais Pellissier said during a conference call. “Orange’s profitability has been under pressure since 2009, with prices slashed and important changes in European telecoms.”

Chief Executive Officer Stephane Richard was offered another four-year term by the board last month, as Orange navigates price wars and its competitors consolidate. So far, spending cuts have helped the 52-year-old executive offset some of the decline in profit.

Orange shares rose 4.6 percent to 11.34 euros at 2:10 p.m. in Paris, giving the company formerly known as France Telecom a market value of 30 billion euros. The stock had gained 33 percent in the 12 months through yesterday.

SFR Sale

Orange gets about half of its revenue in France and the remainder in Spain, Poland, Africa and the Middle East. French executives and government officials have called for further consolidation, probably involving Bouygues SA’s phone unit and Iliad, after Vivendi SA agreed this month to sell its SFR unit to billionaire Patrick Drahi in a 17 billion-euro deal.

Orange aims to slash enough costs this year to make up for about three-quarters of the decline in sales. That compares with savings that offset about half of Orange’s revenue decrease in 2013, and about 70 percent in the first quarter.

The price of mobile packages in France has dropped 30 percent since 2011, when rivals anticipated Iliad’s entry into the market with promotions, Richard said. Orange’s profit margin was 33.3 percent three years ago, in the first quarter of 2011.

While revenue will continue to be “under pressure” in the second half of the year because of regulations in Europe that hurt roaming sales, tariff cuts are winding down in France, Pellissier said.

“Prices have reached floor level in France -- there can still be wars, but not on tariffs,” Pellissier said. “Operators are coming back to a more classic approach, fighting on promotions, marketing and costs.”

Government Stake

The French state, which owns 27 percent of the former phone monopoly, has asked Orange to seek European alliances to help consolidate the telecommunications industry beyond France.

Orange is on the lookout for potential acquisition opportunities in Europe, though there are “very few” targets, Pellissier said. Romania and Moldova are among markets Orange is looking at, with a focus on landline business, he said. Richard said the company is also eyeing Spain and Belgium.

In Spain, where Vodafone Group Plc agreed to buy cable provider Grupo Corporativo Ono SA last month, Orange sees “no urgency” to make a move on a target like Jazztel Plc, Pellissier said.

“Belgium, Romania, Spain, Poland -- These are markets we monitor with great attention,” Richard said today in an interview with BFM radio. “If in any of those countries there was a particular threat or if an opportunity were to arise, we could go very fast.”