CFOPROFILE“Financing €68 billiondebt was the easy bit.”In December 2002 France Telecom had €68 billion in debt andwas being bailed out by the French Government. A year laterdebt has reduced by a third and the company is successfullyplaying the capital markets. Tabitha Neville talks <strong>to</strong> MichelCombes, the modest finance chief at the centre of it all.ILLUSTRATION: RUSS TUDOR“2003 was a good year in terms of revenue growth. It was ayear in which France Telecom <strong>to</strong>ok control of its destiny again.“18 cf March 2004 corporatefinancemag.com
It is fair <strong>to</strong> say that France Telecomhas had a difficult couple of years.In fact, it is probably an understatementwhen you look closelyat how far the company hadfallen down the financial black holeand how far it has had <strong>to</strong> travel <strong>to</strong> ge<strong>to</strong>ut of it. There isn’t a better turnarounds<strong>to</strong>ry around.The teleocm company spent <strong>about</strong>€80 billion ($97.5 billion) in cash onexpansion between 1999 and 2000 (ithas 11.7 million cus<strong>to</strong>mers over fivecontinents) and racked up more than€100 billion debt. Plans <strong>to</strong> refinanceand reduce the company’s debt werenot implemented due <strong>to</strong> the marketturnaround and by April 2001 the company’sshare price had fallen 70% anddebt had ballooned <strong>to</strong> €60 billion (precedingthe fall, France Telecom’s (FT)shares had climbed 200% in less thansix months).In December 2002, the French governmentadvanced a €9 billion loan <strong>to</strong>help the company out of its deepeningfinancial crisis, and <strong>to</strong> prevent it missinga €15 billion debt repayment in2003. For 2002, FT reported a record fullyear loss of €20.7 billion.In February 2004, the companyreported revenues of €46.1 billion. Thecompany’s full-year net profit was €3.2billion a €23.9 billion turnaround from2002. Group debt amounted <strong>to</strong> €45 billionat the end of 2003 compared <strong>to</strong> €68billion a year earlier.CF caught up with Michel Combes,CFO of France Telecom, on the day thecompany issued a €2.5 billion threetranche deal in euros and sterling. Aftera year’s absence the company’s bondswere oversubscribed across all threematurities – the £500 million tranchewas three times oversubscribed and the€750 million eight-year tranche fourtimes – which enabled the company’sbookrunners DrKW, HSBC, JPMorgan,SG and Natexis <strong>to</strong> increase all threetranches. The banks were delightedwith the deal’s reception but Combesplays its success down.“Markets are generally good at thebeginning of the year, and the receptionour issuance received is areflection of this and of the scarcity ofcorporate bonds coming <strong>to</strong> market.”FT 2005:break downFrance Telecomlaunched FT 2005, inDecember 2002. It wasan initiative comprisingfour components:»TOP: a program <strong>to</strong>improve operationalperformance, whichwill generate more than€15 billion in free cashflow <strong>to</strong> reduce debt forthe period 2003-2005;»“15+15+15”: a plan <strong>to</strong>strengthen the group’sfinancial structure;»€15 billion via the TOPprogram;»€15 billion in freshequity, with theparticipation of theFrench State in itscapacity as shareholderThe €2.5 billion issue was atechnical refinancing move, and a liabilitymanagement exercise, saysCombes; a debt optimisation process.“The conditions of the three tranchesare better than the average cost of debtfor FT at the tme and it was not a questionof liquidity but a question ofreprofiling debt and rebalancingcurrencies. We had low reimbursementin 2007 and 2008 and no reimbursementin 2012, 2013 and 2014. The bondimproves this maturity profile. It wasan opportunistic move by us [FT is cashflow generative and positive and has noneed for funds] and allowed us <strong>to</strong> strikea better balance between our euro andsterling debt. Our sterling cash generationis rising and it seemed anappropriate time for increase insterling denominated debt.”More importantly, the success of thebond demonstrated the quality of FT’scredit and the financial markets’ voteof confidence in FT’s financial health. Itwas also further vindication of the company’smanagement, turnaround plansand execution. It is a long way from thepro rata <strong>to</strong> itsshareholding interest,i.e. for approximately €9billion;»€15 billion euros fromrefinancing debt;»A strategy focused oncus<strong>to</strong>mer satisfactionand integratedoperationalmanagement of aportfolio of assetscomprising businessesthat are leaders in theirprincipal markets, withstrong brands such asFrance Telecom,Orange, Wanadoo andEquant. Assets withweak strategic andfinancial positions orthose for whichmajority control is notpossible will beconsidered fordivestment. FranceTelecom will pursuestrategic partnerships inareas outside its coreactivities or those whereit cannot achieve criticalmass;»A completely newmanagement team ledby Thierry Bre<strong>to</strong>n,with asimplified organizationand greaterresponsibility assigned<strong>to</strong> managers.Just over a year later,the company hasreduced its on-balancesheetnet debt by €23.8billion <strong>to</strong> €44.2 billion.The TOP indica<strong>to</strong>r“Operating incomebefore depreciation andamortization lessCapex” increased by66.1% on a comparablebasis (63.4% on ahis<strong>to</strong>rical basis), <strong>to</strong>reach €12.2 billion atDecember 31, 2003.state of affairs in December 2002, whenFT struggled <strong>to</strong> raise financing in thecapital markets and avoid a liquiditycrisis. “We were facing such huge reimbursementamounts that the marketswere effectively closed <strong>to</strong> us.“What has been achieved in the last12 months is due <strong>to</strong> a dedicatedmanagement team with clear strategicgoals and strong execution skills,” saysCombes.On December 4 2002, the same daythe French government agreed its €9billion bailout of the company, ThierryBre<strong>to</strong>n, CEO, announced the initiativethat was <strong>to</strong> turn the company around.Called the FT2005, the initiativeincluded: TOP – a program <strong>to</strong> improveoperational performance and generatemore than €15 billion in free cash flow<strong>to</strong> reduce debt; and 15+15+15 – a plan<strong>to</strong> strengthen the group’s financialstructure through the TOP program,raising €15 billion in equity and €15billion from refinancing the company’sdebt (see box). The majority of savingsin 2003 concerned optimization ofinvestments and working capitalcorporatefinancemag.com March 2004 cf 19
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