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France Telecom Revenue Exceeds Estimates Amid Iliad Rivalry

France Telecom SA (FTE), the country’s largest phone company, reported a smaller-than-estimated decline in first-half revenue after price cuts helped slow customer defections to discounter Iliad SA (ILD) in France and on market-share gains in Spain from Telefonica SA. (TEF)

Sales fell 3.2 percent to 21.8 billion euros ($26.5 billion) from a year earlier, the Paris-based operator said today. That compares with the 21.7 billion-euro average of analyst estimates compiled by Bloomberg.

France Telecom’s French wireless market share stabilized at about 38 percent last quarter. Iliad, which began selling mobile-phone subscriptions under the Free brand in January, scooped up 4 percent of the market in its first 80 days by distributing solely over the Internet and offering phones separately from contracts. Even in crisis-stricken Spain, France Telecom boosted revenue by 2.3 percent in the period.

“We’ve been progressively winning market share in Spain for a few quarters with prices about 15 percent lower than our rivals and a sophisticated marketing strategy,” Chief Financial Officer Gervais Pellissier said on a conference call.

France Telecom climbed as much as 3.2 percent to 10.59 euros and traded 1.5 percent higher as of 9:20 a.m. in Paris. The stock has lost 15 percent this year through yesterday, compared with a 7.7 percent decline of the 23-company Bloomberg Europe Telecommunication Services Index.

Targets Confirmed

Telefonica yesterday reported a 13 percent slump in second- quarter revenue. Spain’s largest phone company suspended its dividend, cut a revenue forecast and slashed compensation for top executives.

France Telecom confirmed its target to generate an operating cash flow of about 8 billion euros this year after 4.5 billion euros in the first half. It also confirmed its plan to pay 40 percent to 45 percent of its 2012 operating cash flow as dividend.

Earnings before interest, taxes, depreciation and amortization dropped 8 percent to 7 billion euros, meeting analysts’ estimates.

“They’re really good numbers across the board,” said Will Draper, an analyst at Espirito Santo in London who recommends buying the shares. “They prepared better and earlier than people expected to face Iliad.”

Roaming Agreement

France Telecom is betting that consumers will pay a premium of 14 euros on average for its packages to receive handset subsidies and gain access to 1,200 stores as well as customer service. The unit makes 75 percent of its sales through two-year contracts.

The company has signed a six-year roaming agreement with Iliad, which France Telecom said would bring 1 billion euros in revenue in the first three years.

France Telecom has said it will continue subsidizing handsets to keep consumers. Elsewhere in Europe, rivals are reconsidering. In Spain, Telefonica stopped subsidizing mobile phones in March, while Vodafone Group Plc (VOD) has said it will do the same in the country.

The French operator isn’t considering any major acquisitions, though it would look at opportunities if the Spanish market were to consolidate, Pellissier said. TeliaSonera AB (TLSN) CEO Lars Nyberg said as recently as on July 18 that its Spanish unit Yoigo was for sale.

“If Yoigo was for sale, obviously we’d look at this opportunity,” Pellissier said.

To contact the reporter on this story: Marie Mawad in Paris at mmawad1@bloomberg.net

To contact the editor responsible for this story: Kenneth Wong at kwong11@bloomberg.net

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