France Telecom SA’s debt rating was cut for the first time in a decade by a rating company on concern that the country’s former phone monopoly will struggle to raise prices and boost profitability amid competition at home from discounter Iliad SA.
Fitch Ratings today lowered France Telecom’s rating by one level to BBB+, the third-lowest investment grade. Standard & Poor’s and Moody’s Investors Service rate the company one notch higher at the fourth-lowest investment grade.
France Telecom reduced its planned dividend last week for a second time this year after third-quarter earnings and sales declined, in a bid to keep debt under control and avoid credit- rating cuts. The move followed similar dividend reductions from European peers such as Telefonica SA.
“A telecom incumbent cannot be rated in the A category when its domestic business is hemorrhaging,” said Roger Appleyard, head of global credit research at RBC Capital Markets in London. “The French market is so competitive, with companies such as Iliad or SFR or Bouygues, that we don’t really know where the bottom is.”
Iliad, founded by French entrepreneur Xavier Niel, scooped up about 5.4 percent of the French mobile market in its first six months of business after it started selling discounted phone packages in January under the brand name Free. It distributes exclusively over the Internet and doesn’t subsidize handsets, in a strategy based on lower prices and costs on average compared with those of rivals France Telecom, SFR -- a Vivendi SA unit -- and Bouygues SA.
“The downgrade is based on the continued pressures in France Telecom’s core domestic business,” Fitch said today. “Increased competition is causing the company’s cash flows to decline.”
France Telecom’s 1 billion euros of senior unsecured bonds due June 2022 today fell 0.3 percent to 103.87 cents on the euro, according to Bloomberg prices.
France Telecom has said its operating cash flow would only grow again in 2014 once pricing pressure stabilizes in France. Chief Executive Officer Stephane Richard refocused on preserving cash eight months ago, when the company cut its dividend forecast for the first time and abandoned a promise to buy back shares.
Still, the Paris-based company also faces the threat of having its credit rating reduced for the first time since 2002 by Moody’s Investors Service, which said in August that the company may have trouble sustaining debt ratios. Standard & Poor’s also has a negative outlook on France Telecom’s rating.
“France Telecom is set to lose all three of its A ratings and Fitch kicked the process off,” Appleyard said. “Its just a matter of time before Standard & Poor’s and Moody’s downgrade the company’s ratings as well.”
As competitive pressures weigh on prices, especially in France, France Telecom is betting it can charge consumers more by investing in improved networks and new services. Richard said this month that the rollout of a faster wireless Internet network is vital to charge clients more money.
“Although Fitch recognizes the importance of these investments for the company’s long-term success, in Fitch’s opinion the current economic climate is not conducive to such an investment,” Fitch said. “Consumers may not be willing to increase their telecoms spend in times of austerity.”
France Telecom declined 29 percent in Paris trading this year through yesterday, making the stock the third-worst performer in the country’s CAC 40 benchmark Index which gained 7.9 percent. Today, France Telecom was up 0.8 percent as of 3:19 p.m.
France Telecom, the owner of the Orange brand, said Oct. 25 that it will pay a dividend of at least 80 cents ($1.04) each for 2012 and 2013, as much as 41 percent lower than last year. This marks a drop from a 2011 dividend of 1.40 euros.
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