UPDATE 2-France Tel Q1 profit falls, lifts Spanish stake

* Q1 capex 1.23 bln euros, vs 1.49 bln year-earlier

* 2009 capex to stay at just under 12 pct of revenue

* To raise stake in France Telecom Espana

* Confirms organic cash flow target

* Shares up 1.7 percent

(Adds analyst comment, background, share price)

By Sophie Taylor

PARIS, April 29 (Reuters) - France Telecom (FTE.PA) posted a forecast-lagging 7.1 percent fall in first-quarter core profit on Wednesday and said it would increase its stakeholding in its Spanish unit.

Europe's third-largest telecoms operator by market value had earnings before interest, tax, depreciation and amortisation (EBITDA) of 4.30 billion euros ($5.6 billion) in the three months to March 31.

The first-quarter performance compared with expectations of 4.40 billion euros based on the average of nine analyst estimates compiled by Reuters Estimates. [ID:nLS816521]

"It's disappointing, just as it was for KPN and Deutsche Telekom," said one analyst. "We underestimated the effect of the exchange rate and economic environment, even if France did show exceptional resistance."

Dutch telecoms group Royal KPN (KPN.AS) cut its 2010 revenue outlook on Tuesday, switching focus to margin and cash flow as the pace of economic downturn quickened in the first quarter. [ID:nLR596074]

And last week Germany's Deutsche Telekom (DTEGn.DE) slashed its outlook amid weak economic conditions. [ID:nLL40204]

Shares in France Telecom were 1.7 percent higher at 16.72 euros by 0728 GMT, outperforming a 0.4 percent firmer DJ Stoxx European telecom index .SXKP.

France Telecom said capital expenditure in the first quarter was 1.23 billion euros, down from 1.49 billion a year earlier. This amounted to 9.7 percent of revenue compared to 11.5 percent in 2008.

Capex should stay at just under 12 percent of revenue in 2009, Chief Financial Officer Gervais Pellissier told reporters. "If we observe a new deterioration in the economic environment, our investments may be scaled back in order to preserve cash generation," he said.

The group confirmed its organic cash flow target of 8 billion euros this year, the same level as in 2008.

"The cash flow guidance is reassuring, but that's by reducing capex which means the situation is getting a bit tense," a second analyst said.

SPANISH STAKE

First-quarter revenue was 12.7 billion euros, down from 13.0 billion a year earlier. Revenue growth this year should continue to "significantly" outpace the average GDP growth in the firm's geographic footprint, Pellissier said.

"But the fact that revenue growth will be weak, even close to zero, will continue to weigh on EBITDA margins, as we indicated at the beginning of the year," he added.

Business growth slowed "significantly" in emerging markets, the firm added, with revenue down 0.5 percent on a comparable basis, versus a 7.2 percent increase in 2008's last quarter.

This was mainly due to slower growth in operations in Eastern Europe and to a lesser extent Africa. Revenue from operations in France rose 2.1 percent on a comparable basis.

France Telecom, which ranks by market share behind Britain's Vodafone Group (VOD.L) and Spain's Telefonica (TEF.MC), also said it would increase its shareholding in its Spanish unit to 99.85 percent from 81.6 percent.

The main minority shareholders in France Telecom Espana have agreed to sell their shares for 1.37 billion euros, France Telecom said.

The number of France Telecom customers came to 183.5 million at the end of March, an increase of 10.9 million new customers, net of terminations, the group said. (Editing by James Regan and Dan Lalor) ($1 = 0.7683 euro)