Vive La Telecom?

CEO Breton's dizzying pace has investors betting on France Télécom

At 11 p.m. Paris time on Dec. 4, the mobile phones of France Télécom's (FTE ) 50 top managers worldwide lit up with a text message. The company's new chief executive, Thierry Breton, wanted them to dial into a conference call toute de suite. France Télécom's board had just approved Breton's plan to overhaul the debt-burdened company. Wasting no time, the CEO told managers to get to work implementing his scheme the next morning. "Our plan requires that everyone in the company be engaged," says Breton in an interview at France Télécom's Paris headquarters.

Engaged--and pedaling as fast as they can. Breton, 48, has set a furious pace since replacing Michel Bon as boss of the ailing French phone giant last October. In a bid to strengthen his control over the telco's far-flung operations, Breton acted quickly to remove the chief executives of France Télécom's separately listed subsidiaries, mobile operator Orange and Internet service provider Wanadoo, and place trusted lieutenants in top posts. More than 3,000 managers now have their pay linked to rigorous performance targets, and they're reviewed every six months, instead of annually, as was the case under the more easy-going Bon.

At the center of this whirlwind is Breton himself, a curly-haired computer whiz who writes science fiction in his spare time. He has already rescued another ailing French company, consumer-electronics maker Thomson Multimedia. Now he vows to turn France Télécom back into the profitable business it was before Bon disastrously overpaid for a pile of acquisitions and 3G licenses, turning a clean balance sheet into a $76 billion black hole. If Breton can make this dinosaur dance, he'll have pulled off the greatest rescue to date among Europe's beleaguered telcos.

The turnaround may have already started. On Jan. 29, France Télécom announced 2002 sales were up 8%, to $50.7 billion, and that it expected pretax earnings substantially above consensus estimates of $15.7 million. "The new management team is refocusing on margins and setting clear targets," says Paul Cooper of Sarasin Investment Management Ltd. in London. After shunning France Télécom because of its heavy debts, Sarasin's fund managers are taking a second look, Cooper says. Join the party: France Télécom's shares have tripled in value, to $25, since Breton was appointed CEO on Oct. 2, outperforming most of its European peers.

When Breton stepped in, the telco's shares were trading at a fraction of their peak of $212 in March, 2000, and its debt rating had been downgraded to a notch above junk level. Breton has pledged to pare $30 billion from the debt load over the next three years. And he promises to wring out $16 billion in internal cost savings over that time. In the past few weeks, he also has tapped the bond markets for about $9 billion. That should help restore a firmer tone to the balance sheet. What's more, Breton has secured a $9.8 billion line of credit from the French government, which owns 56% of France Télécom. The loan is to be converted into shares when the company completes an expected $16 billion share issue, probably this spring.

Even with help from a friendly government, cutting almost half the debt in such a short time is a tall order. Breton's track record certainly inspires confidence. In 1997, he was named CEO of Thomson, a state-owned basket case so beyond hope that Paris tried to peddle it to Daewoo for a single franc. Breton, who also put in time at French computer maker Bull, pulled Thomson out of the red in just one year and steered it into new, higher-margin businesses such as digital editing services for film.

Breton's turnaround record will certainly be tested in his new job. The hyperkinetic executive has set himself a tough challenge--to save France Télécom without dismembering it. In contrast, other heavily indebted European phone giants, such as Deutsche Telekom (DT ) and Britain's BT Group PLC (BTY ), have tried to climb out of trouble by selling off piles of assets.

Breton has sold some stuff, such as a stake in satellite company Eutelsat. And he has pared back Orange's spending in secondary markets such as Switzerland and Sweden. But he's not putting any of the juicier assets on the block, such as Orange, Wanadoo, or Equant, a fast-growing business that is a global leader in providing data services to corporations. Breton contends that keeping these businesses together makes sense because customers want a full range of services. And while he expects to pare 22,000 jobs--about 15% of France Télécom's total workforce--through attrition over the next three years, Breton claims no major layoffs are in the cards. He also has pledged to spare investment in research and development, even making a special visit to France Télécom's labs to reassure engineers that their jobs aren't in jeopardy. Just last month, for instance, the company rolled out a Wi-Fi kit that lets customers set up wireless networks in their homes--the latest step in a drive to deliver more consumer-friendly products. "The real force of a company like France Télécom is to be able to develop innovations," says Breton, who admits he loves trying out the latest high-tech gadgets from the company's labs.

Some caution that Breton's plan for a full-service company is risky. Revenues from fixed-line service still account for more than one-third of France Télécom's sales, but they are shrinking 7% a year. And as the company tries to develop more exotic offerings, ranging from corporate optical networks to consumer wireless content, it faces competition from more narrowly focused rivals such as French fiber newcomer Completel Europe (CLTLF ) or Silicon Valley content king Yahoo! Inc. (YHOO ) "All the [telephone] carriers have tried to develop new services in their R&D labs, but they haven't created anything compelling or generated significant revenues," says Lars Godell, an analyst at Forrester Research Inc. in Amsterdam.

Another cloud on the horizon is the recent announcement of a probe by European Union regulators into that $9.8 billion line of credit from Paris. Even though France Télécom hasn't tapped the money, Brussels might determine that the government's involvement made it easier for the company to float its recent bonds. In that case, the company could be required to pay millions in penalties.

The investigation is likely to drag on for at least 18 months, though. In the meantime, Breton could make good progress at France Télécom. The last four months have been hectic, but he appears to be having the time of his life. "We're creating a spirit that is positive and dynamic," he says. France Télécom managers had better keep their cell phones handy in case the boss calls.

By Carol Matlack and Andy Reinhardt in Paris

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