If you are watching the French Open, you've seen some great tennis! and you've probably noticed advertising by Orange. France Telecom (FTE) will officially become Orange on July 1, 2013.
France Telecom is approximately 27% owned by the government of France and has 37% of the market share in France. The company has approximately 230 million customers worldwide and increased customers by 2.6% in the year ending March 31, 2013.
Orange focuses its business on the European Union and the fast growing Africa/Middle East region, the latter grew customers 8.2% over the past year according the company's most recent earnings press release.
Consolidated revenues were down 1.8% year-over-year due to continued recession throughout the Eurozone and lower pricing driven by intense competition in the wireless device market. Enterprise revenues were down 5.3%.
A major problem for France Telecom is its overwhelming debt burden. The company has roughly $52 billion in debt and it takes in a little over $56 billion in revenue. FTE has committed to strengthening its balance sheet through cost cutting. One such cut has been a reduction in the dividend. The dividend was 1.40 Euros or roughly $1.80 per share during years 2008-2011. As a result of the cost cutting efforts, the company has set a 2013 year end balance sheet target, which is 2x Net Debt to EBITDA.
France Telecom has committed to paying a dividend of .80 Euros during the upcoming fiscal year or roughly $1.00 per share (constant currency Euros to Dollar). FTE shares are presently trading near $10. At $10 per share, the $1.00 US dividend equates to a 10% yield. If the company can return to the 2008-2011 dividend payment level in the next few years, it would equate to roughly $1.80, an 18% yield (constant currency) at a $10 stock price. Caveat, FTE will need to see major improvement in its business for that to happen.
An additional concern is the elimination of roaming fees in the EU. With growth prospects limited by the ongoing EU recession, FTE cannot afford any revenue losses, which would further hamper its ability to meet debt obligations.
On the positive side, the French government, being an equity owner in FTE, will most likely support the company wherever possible. Interest rates in the EU are not likely to rise anytime soon.
Bottom line, for investors who can manage a high level of volatility and who have a positive near-term view for the Eurozone, Orange could be worth a look. However, if FTE cannot stem the decline in revenues and EBITDA, I would use a tight stop loss. If the EU economy picks up and Orange executes its plan successfully, returning revenues and profits to a positive growth trajectory, FTE shares could appreciate meaningfully and provide investors a nice payment during the wait.