France Telecom CFO Says Stock, Cash Generation Undervalued

France Telecom SA CFO Pellissier
Stephane Richard, chief executive officer of France Telecom SA, left, speaks with Gervais Pellissier, chief financial officer of France Telecom SA. Photographer: Antoine Antoniol/Bloomberg

France Telecom SA’s market value doesn’t accurately reflect the company’s ability to generate cash and trails the former phone monopoly’s own projections, Chief Financial Officer Gervais Pellissier said.

“The stock market is too pessimistic about our ability to generate cash flow from operations,” Pellissier said in an interview at the carrier’s Paris headquarters yesterday. “The estimates underlying our market cap today seem low compared to our own vision on cash generation.”

France Telecom was the worst performer in the country’s benchmark CAC 40 Index this year amid falling prices of phone packages prompted by discounter Iliad SA and concerns over cash flows. Chief Executive Officer Stephane Richard cut the company’s dividend forecasts in October, while Fitch Ratings downgraded its debt. Yesterday, its Orange wireless unit and Vivendi SA’s SFR division were fined 183 million euros ($239 million) by antitrust authorities over tariffs they offered between 2005 and 2008.

Pellissier, who is also delegate CEO to Richard, said France Telecom doesn’t feel pressure from its lenders and has enough liquidity to meet maturities and to pay a dividend. The company intends to keep a lid on its debt as it examines opportunities for acquisitions, he said.

U.K. Venture

“We’re one of the European phone companies that aren’t subject to worry about balance-sheet issues,” Pellissier said. “Still, having an eye on our balance sheet means we’re not going to do foolish acquisitions and we’re not going to spend inefficiently on capex.”

The stock has dropped 30 percent this year, while the CAC 40 jumped 15 percent. It’s the third-biggest decliner in the 23-company Bloomberg Europe Telecommunication Services Index. The shares slipped 0.4 percent to 8.52 euros at 9:15 a.m. in Paris, valuing the company at 22.6 billion euros.

France Telecom, which had net debt of 31.2 billion euros at the end of the first half, will look at what assets it can sell to finance any acquisition opportunities, Pellissier said.

The company will consider a bid for TeliaSonera AB’s Yoigo unit in Spain by the end of the year and is potentially interested in Vivendi’s Maroc Telecom SA, though only under “very numerous conditions” including price and any asset overlap, the CFO said.

An initial public offering of a minority stake in the EE wireless venture in the U.K. with Deutsche Telekom AG may take place toward the end of next year or early 2014, Pellissier said. A decision with the German partner will depend on the pace at which EE can win customers of premium packages based on high-speed 4G wireless technology, he said.

Home Competition

France Telecom is also betting on high-speed packages -- whether 4G on mobile or fiber on fixed-line internet -- to boost the phone bills of consumers in its home market, the executive said.

“We think most of the bad news is behind us,” said Pellissier, who expects the focus to shift from just lowering prices. “We believe in our ability to monetize data consumption and higher speed.”

At home, France Telecom competes against Vivendi, Bouygues SA and Iliad. Iliad, founded by Xavier Niel, scooped up 6.4 percent of the French market in its first nine months by selling packages starting at 2 euros a month.

France Telecom has forecast its operating cash flow would only grow again in 2014, once price pressure stabilizes in France. Operating cash flow will be more than 7 billion euros next year, from a target of close to 8 billion euros in 2012.

Dividend ‘Guarantee’

The owner of the Orange brand has said it will pay a dividend of at least 80 cents each for 2012 and 2013. The 2011 dividend was 1.40 euros.

“We set the dividend level perhaps lower than some had expected, but that’s allowed us to guarantee it for two years,” Pellissier said.

Competitors in the telecommunications business, an industry which has paid generous dividends historically, have also curbed payouts. Deutsche Telekom, Royal KPN NV and Telefonica SA have slashed or even completely scrapped their dividend plans.

With a yield of 16 percent, France Telecom’s stock return is still almost double the average among western Europe’s former phone monopolies.

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