April 29 (Bloomberg) -- France Telecom SA, Europe’s third- largest phone company, said first-quarter earnings fell 4.4 percent on a comparable basis on costs to buy programming for its new television services in France.

Earnings before interest, tax, depreciation and amortization fell to 4.3 billion euros from 4.63 billion euros a year earlier, the Paris-based company said in a statement today. Sales dropped 2.6 percent, hurt by exchange rates.

France Telecom, which has operations in countries ranging from Poland to the Ivory Coast and the U.K., has changed how it reports earnings to focus on countries instead of technology, as it seeks to offer more combined fixed-line and mobile services. The company last year started TV services in France including a sports channel as subscriber growth in its home market wanes.

“At the larger operators you see a number of geographical markets that are under pressure,” said Rob Goyens, an analyst at Dexia in Brussels.

Ebitda had been seen at 4.45 billion euros, the average estimate of three analysts in a Bloomberg survey.

France Telecom rose 1.7 percent to 16.71 euros at 10:25 a.m. in Paris. Before today, France Telecom shares dropped 18 percent this year, compared with a 10 percent decline for the 21-member Bloomberg Europe Telecommunication Services Index.

Cost Measures

The company repeated its March forecast to maintain free cash flow at the 2008 level of 8 billion euros through to 2012. At the time, France Telecom said it planned cost savings of 1.5 billion euros a year by the end of 2011 through measures such as reducing the costs of its computer-services centers.

The company said it will cut capital expenditure to less than 12 percent of sales this year, from a previous plan to spend between 12 percent and 13 percent. Spending cuts may increase if the economy deteriorates further in order to maintain organic cash flow, France Telecom said.

“They’re maintaining the target but there will be lower investment,” Goyens said. “As a shareholder, you can be positive about that because the dividend payment is linked to free cash flow.”

France Telecom said it agreed to buy out the main minority shareholders in Spain’s France Telecom Espana for 1.37 billion euros, raising its stake to 99.85 percent from 81.6 percent. The sellers are Banco Santander SA, Unicaja, Caja de Ahorros del Mediterraneo, Credit Suisse Group AG and Deutsche Bank AG.

The transaction was based on 2005 valuations, according to Dexia’s Goyens, meaning France Telecom is paying “a rather steep” price.

Revenue Slide

First-quarter sales slipped to 12.69 billion euros from 13 billion euros a year earlier, the company said. That was less than the 12.84 billion euros estimated by analysts.

Exchange-rate fluctuations, mainly the drop of the pound and the Polish zloty against the euro, cut sales by 409 million euros, France Telecom said. Excluding the effect of currencies and acquisitions, sales rose 0.4 percent.

The results “show the resilience of telecom activities in general and especially us,” Chief Financial Officer Gervais Pellissier said on a conference call. Profit fell because of “a lower contribution from sales growth but also the full effect of content purchases for the television channels,” he said, adding there were no costs for TV programs a year earlier.

France Telecom said gross domestic product in its markets shrank by an estimated 1.7 percent in the first quarter. Sales growth will exceed average economic growth in its markets in coming years as clients are reluctant to give up subscriptions and phone services account for a minor part of household spending, Chief Executive Officer Didier Lombard said in March.

“The fact that sales growth will be weak, or close to zero, will continue to weigh on the Ebitda margin,” the CFO said.

Telekomunikacja Polska SA, the Polish phone company controlled by France Telecom, yesterday reported first-quarter net income fell 52 percent to 328 million zloty ($94 million) and sales declined 4.9 percent to 4.31 billion zloty.

To contact the reporter on this story: Rudy Ruitenberg in Paris at rruitenberg@bloomberg.net.

Last Updated: April 29, 2009 04:27 EDT