Orange Tax Expense Prompts Predictions of Rating Cut

Orange SA fell the most in more than a year after France’s former phone monopoly disclosed a tax expense topping 2 billion euros ($2.6 billion), prompting predictions of a credit-rating cut and overshadowing cost-cutting efforts to sustain profits.

The company previously known as France Telecom said today it plans to appeal a decision requiring it to pay 1.95 billion euros in July and 190 million euros in September to the French tax authorities for issues related to simplifying the group’s structure in 2005. The stock dropped as much as 5.6 percent, the biggest intraday decline since June 2012.

“While the cash impact is immaterial, the accounting treatment changes results, which will likely have a negative impact in credit rating agencies’ views,” Goldman Sachs Group Inc. analysts Andrew Lee and Joshua Mills said in a note.

France’s largest phone operator, which has expanded into the Middle East and Africa, is navigating falling phone bills in Europe and political turmoil in countries such as Egypt. Chief Executive Officer Stephane Richard is cutting costs and shying away from acquisitions to reduce debt, in efforts to revive a stock that’s falling for a sixth year.

The stock fell 4.8 percent to 7.38 euros at 1:08 p.m. in Paris, taking its decline to 12 percent this year.

Earnings Fall

Orange said it has kept a high level of liquidity to meet the tax payments, which will have “no impact on the operating performance.”

The Paris-based company today posted an 8.5 percent drop in second-quarter earnings before interest, taxes, depreciation and amortization, to 3.29 billion euros, in line with analysts’ estimates. Sales fell to 10.3 billion euros.

Standard & Poor’s in April cut Orange’s rating by one step to the third-lowest investment grade, while Fitch Ratings lowered its rating in October. Both have a stable outlook. Moody’s Investors Service has a negative outlook on its A3 credit rating for Orange, the fourth-lowest investment grade.

“Two agencies today rate us with a stable outlook and one has a negative outlook” and “I expect this tax event is the occasion for this agency to downgrade,” Chief Financial Officer Gervais Pellissier said on a conference call. “Still, I don’t expect that we would be out of the scope of the best-rated operators in Europe.”

Orange today confirmed it plans to reduce its ratio of net debt to Ebitda to close to 2 times by the end of 2014, from 2.2 times at the end of this year. The company also reiterated it will pay a dividend of at least 80 cents a share for 2013, including an interim portion of 30 cents to be paid in December.

Cost Cuts

Orange repeated its forecast for an operating cash flow of more than 7 billion euros this year, compared with 8 billion euros in 2012. The company is betting on cost cuts to help reach this target despite increased competition, including in France where Iliad SA started selling discounted mobile packages in January last year.

CEO Richard, confirmed in his role last month after facing a fraud charge linked to a previous job at the French finance ministry, forecast the company will exceed its initial target of 600 million euros of savings this year.

“Our earnings show we’re totally dedicated to cutting our costs,” Richard said on a call. “We’ve started reducing staff by using demographics to our advantage, and this effort will continue paying off in the coming months and years.”

Selling part of EE, Orange’s joint-venture with Deutsche Telekom AG in the U.K., could bring in extra cash. The parent companies have hired banks to start work on an initial public offering of part of EE, Pellissier said. The operation will probably be presented to the market in 2014, he said. A sale to private equity firms isn’t the preferred option at this point, the CFO said.

International Expansion

Orange, which makes more than half of its earnings at home, has sought growth in markets such as the Middle East and Africa. In the past three years it entered Morocco, Iraq and the Democratic Republic of Congo. Its fastest-growing region last year was the Middle East and Africa and Orange forecasts revenue from the region will rise to 7 billion euros by 2015.

Still, the company has faced some obstacles. A year after Orange struck a $2 billion deal to raise its stake in its Mobinil venture in Egypt, the company in February reported a 400 million-euro impairment cost on increased risk there.

This week Egypt’s army chief urged the public to take to the streets and give the military, which toppled President Mohamed Mursi three weeks ago, a mandate to stamp out the violence which has roiled the country since then.

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