France Telecom is cutting its dividend and putting off a promised share buyback to conserve cash in the face of brutal competition from a new mobile player and Europe's ongoing debt crisis. France has been locked in a mobile price war since mid-January, when Iliad launched its ultra low-cost mobile offers, leading France Telecom to lose 201,000 customers to date.
In addition, borrowing has become more expensive, especially after France lost its prized top credit rating, and the economic outlook is darker than a year ago, Chief Executive Stephane Richard told Reuters in an interview.
"The priority is to secure cash, especially since the European debt markets have been basically closed for the past six months," said Richard.
As a result, Richard predicted a "calm" year on the acquisition front, a shift from recent years when the company spent to expand in high-growth Middle Eastern and African markets.
"The economic and competitive environment does not lend itself to major transactions," says Richard.
The new focus on hoarding cash also means France Telecom (Paris) will not buy back shares in 2012 as it had promised investors it would after selling its Swiss unit to a private equity fund for $1.5 billion in December.
Dividends in 2012 and 2013 will be limited to 40-45% of operating free cash flow so as to allow the group to maintain its key debt ratio at two times operating profit.
France Telecom said this would likely lead to a dividend between $1.6 and $1.8 per share next year, down from $1.86 for 2011.
France Telecom's moves are a sign of the times as Europe's telecom operators struggle to find growth amid intense regulatory pressure and tough price competition.
Spain's Telefonica (Madrid) trimmed dividends in December and is focusing on paying down debt, while Dutch operator KPN (The Hague, Netherlands) slashed its returns to shareholders via buybacks.Telecom Italia may cut its dividend when it reports results on Thursday, analysts say, while investors will also look to see what Deutsche Telekom does when it reports the same day.
Analysts seemed unmoved by the dividend cut, which was somewhat anticipated given the industry context. "No doubt the company saw little sense in paying a dividend for which it got little or no credit," wrote Robin Beinenstock, analyst at Bernstein, in a note.
More potentially worrying, however, is the outlook for France Telecom and its rivals Vivendi (Paris) and Bouygues Telecom (Paris) as Iliad's Free Mobile offers force them to slash mobile prices.
France Telecom said it was aiming for operating free cash flow of $10.5 billion in 2012, down from $12.3 billion in 2011. That fall can be attributed to the fact that the group's earnings before interest, tax, depreciation, and amortization (EBITDA) is expected to slump by $1.3 billion this year, Richard explained.
"This year will be the real low point for us in terms of competition in France," he said.
In 2011, France Telecom saw its revenues and operating profits deteriorate, hit by regulatory measures, new taxes, and political unrest that affected its Egypt and Ivory Coast units. Revenue fell 1.6% on a comparable basis to $60.2 billion, in line with the consensus forecast, according to Thomson Reuters I/B/E/S.
France Telecom's domestic business, which accounts for half of revenues and profits, held up relatively well given the tougher competition as operators jockeyed to lock in market share before Iliad's arrival.
French revenue slipped 3.3% to $3.3 billion, while EBITDA fell 3.7% to $11.4 billion.
(Editing by James Regan and Andrew Callus)