Citing concerns about mobile pricing pressure in the French market and an anticipated big drop in France Telecom / Orange’s earnings, S&P has decided to follow Fitch’s lead and cut France Telecom’s debt rating to BBB+, the third lowest investment grade. This cut puts France Telecom somewhere in the middle of the European telco pack in terms of credit worthiness, as it’s now trailing the UK’s Vodafone (deemed the most creditworthy) and in-line with Germany’s Deutsche Telecom, but still better off than Spain’s Telefonica.
S&P’s ‘intuition’ seems to have been spot on because the telco announced today a 9% drop in first quarter adjusted earnings, 5.9% drop in revenue and 6.2% in revenue at their mobile unit. Although their pricing problems due to an increasingly contentious competitive environment in France, France Telecom actually saw their revenues drop in many big countries.
To turn things around, France Telecom is pinning their hopes on aggressive cost cutting as well as the roll-out of their high-speed, 4G wireless network. However, as Bouygues and SFR are also rolling out their own 4G service this year, it’s hard to see how this will be a competitive advantage for them. In addition, Orange plans to charge an additional 5 to 10 euros to customers with monthly bills between 30 to 50 euros who take the 4G service, hoping to generate a big revenue bump. But, due to a continuing challenging competitive environment and the eventuality that 4G will become the norm and ultimately integrated into standard mobile service, any financial benefits are likely to be short-lived.