Untangling the Wires at France Télécom
Thierry Breton, the new head of France Télécom, faces one of the toughest turnaround challenges in the corporate world. The former state-owned phone monopoly was once the bluest of blue chips. That all changed in the late '90s when former CEO Michel Bon embarked on a four-year, $80 billion spending spree, snapping up acquisitions in Europe and the U.S. while forking out billions of dollars for next-generation mobile-phone licenses.
By the time Breton came aboard to replace Bon last October, France Télécom was staggering under a $76 billion debt, making it the most heavily indebted public company in the world outside Japan. Its shares were trading at about $8, down from a peak of $212 in March, 2002. And a liquidity crisis was looming, with more than $15 billion in debt payments due in 2003 (see BW, 2/17/03, "Vive La Télécom?").
None of this has fazed Breton, however. The 48-year-old dynamo, who rescued French consumer-electronics maker Thomson Multimedia from near-collapse in the late '90s, is off to an impressive start. On Dec. 4, he announced a three-pronged plan to slash the telco's debt by more than $30 billion over the next three years, with a combination of cost cuts, debt refinancing, and a planned $16 billion share issue. What's more, Breton says he can achieve these ambitious targets without selling any of France Télécom's major assets, which include European mobile-phone operator Orange, corporate data-services giant Equant, and Internet service provider Wanadoo. That's a sharp contrast to other troubled European phone outfits that have relied on asset sales to pare their debts.
So far, investors are applauding. The share price has tripled since October, and in December and January, France Telecom had successful bond issues totaling about $9 billion. Those proceeds, coupled with cash on hand and cost-cutting, should cover the debt payments coming due in the next few months, Breton says. The CEO also secured a $9.8 billion line of credit from the French government, which still owns 56% of the outfit. The credit will be converted into shares at the time of the planned capital increase.
With the frenetic pace he has been keeping, Breton seldom grants interviews. But he recently agreed to chat with BusinessWeek Paris Correspondent Carol Matlack. Here are edited excerpts from their conversation:
On restoring market confidence:
We now have a clear, legible plan for France Télécom. The bond markets have already come along with us. We've already succeeded in refinancing a good part of our debt on the bond markets. Our cost-cutting program, called TOP, is very detailed, very well documented. Our goal is to generate, in the next three years, at least 15 billion euros [about $16 billion] in savings. In fact, we have already integrated 3 billion euros into our 2003 budget.
When you add all these savings together, along with what's being raised on the bond markets, this will allow us to regain control of our debt situation and become "normal" over the next three years.
On his reasons for not selling off major assets:
France Télécom will be an operator that will be more integrated and global, that will try to create more synergies among its different activities. That's demanded more and more by our clients, because they're not only using fixed-line service but also mobile, high-speed Internet, and low-speed Internet.
My objective is to see how we can serve our clients better. Each client has problems that are more and more complex -- problems of interoperability, integration. They have a need for increasingly complex services. At the same time, by exploiting these synergies, we can create economies for the company and improve our cash flow.
On the possibility of future asset disposals:
We've said very clearly that we expect our units to be positive for EBIDTA [earnings before interest, depreciation, taxes, and amortization] in 2003 and free-cash-flow positive in 2004. I can't ask shareholders to continue to pay for activities that are not profitable. If we can't make something profitable ourselves, we can look for partnerships, or we can sell things. So if, for example, we're in a market where we're only No. 3 or No. 4 and we're not making money, we need to look for other solutions. On how he plans to improve cash flow:
First, there's optimization of working capital. We will be using classic managerial methods, more rigorous accounting, relationships with suppliers, and so on.
Next is capital expenditure. France Télécom has been in the habit of making heavy investments -- and during certain periods, such as the enormous expansion of mobile telephones, that's a good thing. In fact, we're going to continue to make important investments. For example, we have a very ambitious program in high-speed Internet.
In France, 80% of the population will have access to high-speed connections. But the benchmark for our competitors in capital expenditures has been around 12% to 13% of their revenues, while at France Télécom, it has been about 15% to 16%. We're going to see significant reductions during the next three years and better management of our investments.
The third element is a reduction in operating expenditures. Much of this will depend on synergies. For example, in purchasing: Until now, each unit -- France Télécom, Orange, Wanadoo -- has had its own system. We can integrate this and impose greater managerial rigor. We can also have better coordination of our customer-service functions and better control of spending on advertising, information technology, and so on.
We're in a period of great technological change. We know that today, there's a lot of growth in high-speed Internet and in mobile, but for the future, we don't know what technologies will be the most important. That means you can't just bet on one technology. The real force of a company like France Télécom is to be able to develop innovations. Research and development is fundamental. That's why the first visit I made within the company was to our laboratories. As for myself, I adore technology. I have new technologies -- for example, WiFi -- all over the place at my house. Whenever something new comes out, I like to test it.
On changing corporate culture:
Our managers will have performance targets, and these will be reviewed every six months. Between 3,000 and 4,000 managers are involved in this. This is something that we did also at Thomson Multimedia. It's challenging -- but very effective. The managers like it because it provides a positive motivation.
We're also adapting our methods of governance. France Télécom is going to be an enterprise that serves its clients in a more and more integrated fashion. So, for example, we're setting up a global audit committee, a global investments committee, and so on. Before, each unit had its own committees. Also, we're going to have more independent members on our board of directors.