UPDATE 2-France's Orange cuts costs as mobile price war abates

Tue Apr 29, 2014 5:16am EDT

* Holds operating margin steady despite sales drop

* Q1 EBITDA fell 3.8 pct to 3.02 bln, in line with forecast

* Shares rise 4.6 pct, hit highest in nearly two years

* CFO sees fewer acquisition targets, no rush on Spain

* Open to talks with Bouygues on network sharing, wholesale (Adds shares, analyst comment)

By Leila Abboud and Gwénaëlle Barzic

PARIS, April 29 (Reuters) - France's biggest telecom operator Orange SA has continued cutting costs on everything from staff to mobile phone marketing, allowing it to hold profit margins steady despite lower sales across its major markets.

Its shares jumped more than 4 percent to their highest in nearly two years.

The group on Tuesday posted first-quarter sales and operating profit that met expectations and confirmed its goal for core earnings or EBITDA of between 12 billion euros ($16.6 billion) and 12.5 billion this year.

Group EBITDA fell 3.8 percent to 3.02 billion euros in the quarter, yielding a steady operating margin of 30.8 percent.

Finance chief Gervais Pellissier said the worst of the mobile price war that has raged in France since low-cost player Iliad launched a mobile service in January 2012 was past and noted margins were stablising after five straight years of declines.

"We are maybe not totally out of the tunnel but we do see positive trends," Pellissier said, adding that French telecom operators were switching from across-the-board price cuts to more traditional sales and promotions.

Jerry Dellis, analyst at brokerage Jefferies, said in a research note: "Today's results demonstrate encouraging progress towards the key aspect of guidance that management issued back in March, namely stabilisation of the group EBITDA margin."

With pressure strongest in Orange's key markets of France and Poland, first-quarter sales fell 3.8 percent to 9.8 billion euros on a comparable basis, excluding a 333 million euro charge to settle litigation with rival Bouygues and other one-off items.

Orange continued cutting costs, achieving 267 million euros in savings, with 76 million euros coming from staff costs and 70 million from lower so-called "termination" fees, charged when a mobile phone call moves from one network to another - a trend that is set to benefit the European telecom sector this year.

STRATEGIC ADVICE

One bright spot was Spain, where Orange has been adding mobile customers as it competes with leader Telefonica and second-placed Vodafone, which recently bought cable operator Ono to expand into fixed telephone and broadband.

To figure out a response, Orange hired Bank of America Merrill Lynch to advice it on its strategy in Spain, including the possible acquisition of smaller competitor Jazztel, people familiar with the matter said in March.

But Pellissier said there was "no urgency to move" after the Vodafone-Ono deal, because Orange could negotiate wholesale agreements or partnerships to build high-speed broadband with Telefonica or Vodafone.

"We see fewer acquisition opportunities compared to March, but we will remain attentive to consolidation in European countries where we are already present in mobile and not in fixed," he said.

Orange shares were up 4.5 percent at 11.32 euros by 0909 GMT - the biggest gainers in France's blue-chip index - as investors bet on the group's recovery. The stock rose as high as 11.44 euros, its highest since August 2012.

Orange's 26 percent rise so far this year is the third-steepest in Europe's telecom index, which is down 0.5 percent in the same period.

In a radio interview, Orange Chief Executive Stephane Richard listed Romania, Belgium and to a lesser extent Spain as places where the company could buy fixed assets to complement its mobile operations.

Pellissier added that Orange was open to discussing wholesale agreements in broadband or network sharing with French rival Bouygues, which has a network sharing deal with Vivendi's SFR.

"We are the biggest wholesale provider in France and we're open to all forms of cooperation that allows us to grow our sales," said Pellissier. "If Bouygues knocks on our door, we are open to talking with them."

($1 = 0.7223 Euros) ($1 = 0.7223 Euros) (Reporting by Leila Abboud and Gwenaelle Barzic; Editing by Mark Potter)

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