FOCUS:France Telecom CFO To Pitch Change In Cash Policy

PARIS -(Dow Jones)- France Telecom is looking to give more money to shareholders to address a credibility gap that's caused the company's stock to lag the sector.

In an interview with Dow Jones Newswires, France Telecom Chief Financial Officer Michel Combes said he plans to propose a new cash policy to the company's board in February. "We're refocusing a few things to play on dividends or shareholder buybacks," he said.

France Telecom is expected to generate EUR29 billion in cash over the next three years. Last June, the company said it would split its cash three ways between shareholders, bondholders and acquisitions.

The shift in policy comes after shareholders have complained that the company dedicates too much of its cash to cutting debt, while burdening shareholders with capital increases to restructure and finance acquisitions.

France Telecom has cut around EUR30 billion in debt over the past three years. Yet it has asked shareholders for more than EUR18 billion over the same period, and it suspended its dividend payment in 2003 amid a record loss. The dividends on this year's earnings are only now as high as they were on 2001 earnings.

Europe's second-largest telecoms operator by sales has fallen out of favor with investors, just months after wooing them with its strategy to combine fixed and mobile phone services to boost sales. Shares have fallen 18% since mid August to EUR21.11 from EUR25.82, and they're down 8% from November 2004.

Investors now value France Telecom less than any other European telecom incumbent, according to research by Fideuram-Wargny analyst Jean-Michel Salvador. At 1537 GMT, shares were down EUR0.15, or 0.7%, to EUR21.11, giving the company a market value of EUR55.29 billion.

"The fashion today is not to believe anymore in telecoms, and in particular in France Telecom," Salvador said. Nevertheless, Salvador recommends buying the company's shares.

In June 2005, France Telecom presented a three-year strategy, promising to grow revenue by 3% to 5% a year, beginning in 2005. In September, it asked investors to support the strategy: it sold EUR3.3 billion of shares to finance its acquisition of Spanish mobile phone operator Amena. Then in late October, France Telecom said it would miss its first-year revenue target - prompting further shareholder skepticism.

For Combes, the pressure from shareholders poses a dilemma. France Telecom shouldn't be less aggressive on debt cutting, he said. Just three years ago France Telecom nearly collapsed under EUR73 billion in debt, and the more debt the company has the less flexible it is in a downturn, Combes said.

Still, Combes acknowledges that he must address investors' concerns. If he doesn't give more money to shareholders, he says, he'll further undercut management credibility. Investors question whether France Telecom can really generate the cash it says it will, while others suspect it's hoarding the money to make more acquisitions.

"The icing on the cake is that the guidance has been brought down some, so it is an issue of credibility at the end of the day," said Raj Sinha, an analyst with JP Morgan in London who rates the stock neutral.

France Telecom's shift in strategy reflects investors' increased appetite for risk. Even though the company nearly went bankrupt in 2002 and its debt level is still higher than that of its competitors, investors are still saying that they'd prefer the company to be less conservative.

France Telecom is seeking to cut its net debt to two times its gross operating profit by the end of 2008. Net debt currently stands at around 2.5 times EBITDA. The rest of the sector, save Telecom Italia, has a ratio below 2, according to Salvador's research.

The company's current credibility test began with July's EUR6.4 billion acquisition of Spain's third-largest mobile phone operator. After the deal, France Telecom shares rose 14% in three weeks to a year high of EUR25.82 on August 22.

By September, it was time to finance the Amena acquisition. France Telecom chose to sell EUR3.3 billion worth of new shares to institutional investors. Shareholders would have preferred any other option: that France Telecom used its cash, took on more debt, or sold shares to Amena's investors.

"There has been a real disagreement between shareholders on how we financed (the) Amena (deal)," said Combes.

Then, the whammy. France Telecom said on October 27 that sales won't even grow 3% this year. Investors slashed 7% off France Telecom's value in one day in the highest volumes of the year. Combes said shareholders used the reduced revenue outlook as a pretext to send management a message.

"If it wasn't the revenue, it would have been something else," said Combes.

-By Brian Lagrotteria, Dow Jones Newswires; +33 (0)1 40 17 17 55; brian.lagrotteria@dowjones.com

(END) Dow Jones Newswires "

Posted to the site on 21st November 2005