UPDATE 1-SFR prepares new strategy in French mobile battle

Thu Mar 29, 2012 8:38am EDT

* First round of cost cuts revealed to unions, more ahead

* Deeper strategy review underway for summer -sources

* SFR under pressure from low-cost entrant Iliad (Adds details, share price, background)

By Leila Abboud and Gwénaëlle Barzic

PARIS, March 29 (Reuters) - Vivendi's SFR has begun "urgent" cost-cutting measures and is preparing a deeper strategic plan this summer to cope with brutal competition brought on by new mobile player Iliad, according to an internal document seen by Reuters.

France's second-biggest mobile operator presented the measures to be taken immediately to labour union officials on Wednesday at a meeting presided by Vivendi Chief Executive Jean-Bernard Levy, who took over the helm of SFR on Monday after removing its long-time CEO.

The moves include cutting temporary workers and delaying software projects and specific network fixes, but SFR did not give details in the document or the meeting as to how much money they would save.

Two union sources confirmed the document's validity and described the discussions at the meeting to Reuters.

"In this context, SFR wishes to take the time to analyse calmly the consequences of this disruption of the market," SFR said in the document.

"This reflection could lead to a revised strategy for SFR that will be presented to union representatives when it is ready."

The union sources said that SFR management told them to expect a broader strategy review and more details on cost cutting by this summer.

Like France's other mobile incumbents, SFR is struggling to deal with the fall-out from Iliad's launch of ultra-low cost mobile offers under brand name Free Mobile in mid-January.

Since then, France's telecoms market has been locked in a price war that has forced France Telecom, Bouygues Telecom and SFR to spend heavily to try to retain customers.

Free Mobile has signed up 1.5-2.2 million customers since launching, according to unofficial tallies by rival operators, but it does not plan to give official subscriber numbers until May.

Like rivals, SFR has cut prices on its low-end offers, sold online and without subsidized mobile phones, but it has not gone as far as Bouygues Telecom in cutting prices on the rest of its offers.

TOUGH TASK

SFR said it lost 200,000 customers through the end of February, or 1 percent of its client base. As a result, SFR's core profit will drop 12-15 percent in 2012 and cash flow from operations will decline 15 percent to about 1.7 billion euros ($2.26 billion).

Levy faces the difficult task of trying to squeeze out cost savings to offset the tougher competitive environment. And since SFR generates about half of Vivendi's operating profit, the issue is crucial to the company's fortunes.

Credit Suisse analysts reduced their target price for Vivendi shares on Thursday because of SFR's woes and predicted that SFR's average revenue per user, a key industry metric, could fall by 22 percent through 2015.

"In this context, Vivendi needs to move aggressively to reduce costs, in our view," they wrote, adding that some 500 million euros of cost cuts were possible through 2014.

Union officials said the immediate cost reductions that SFR detailed on Wednesday would affect some 150-200 workers and were a prelude to broader cuts to come.

"They are going to use Free's arrival to put everything on the table in terms of the functioning and organisation of the company," said one union representative.

An SFR spokesman declined to comment.

Vivendi shares were down 0.5 percent at 13.76 euros per share at 1213 GMT. ($1 = 0.7525 euros) (Editing by James Regan)

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