PARIS Orange (ORAN.PA) shares fell more than 5 percent on Thursday after it disclosed that it will have to pay out 2.14 billion euros ($2.83 billion) in its tax dispute with the French state.
Investors knew about the tax case, which stems from differences over how to account for losses at subsidiaries after a implication of the group's structure in 2005, but they were not expecting the bill to be so large, analysts said.
"Today's tax fine will have a negative 1.275 billion euro impact on our sum of the parts <valuation for the group>, or around 6 percent negative impact on the share price," Citigroup analysts wrote in a note.
Orange's Chief Financial Officer Gervais Pellissier said the tax case would have no impact on the group's liquidity or operational performance because the money to pay the back-taxes had been set aside several years ago.
"We've decided to appeal," he said, adding that the fine must be paid while the appeal is still pending.
Orange also announced second-quarter results on Thursday, with a fall in sales and profits coming in line with analyst forecasts as a price war in France sparked by a low-cost mobile rival began to ease and cost-cutting efforts started to pay off.
Sales were down by 4.8 percent on a comparable basis to 10.32 billion euros, while earnings before interest, tax, depreciation and amortization (EBITDA) fell 8.4 percent to 3.29 billion euros.
Europe's fourth-largest telecom group by sales also confirmed its targets for an annual dividend of 0.80 euros per share and operating cashflow of more than 7 billion euros.
"There are elements of good news in France, and we've shown that the group can cut its costs," Pellissier said.
Pellissier noted the benefits of the recent arrival of superfast fourth-generation (4G) mobile technology on the French market, saying that customers signing up for 4G contracts spend 10 percent more a month than traditional customers.
Orange also said that a planned initial public offering (IPO) of EE, which it co-owns with Deutsche Telekom (DTEGn.DE), would not take place before next year to allow Britain's largest mobile group more time to show financial improvements.
EE launched 4G mobile offers in October - earlier than competitors Vodafone (VOD.L) and Telefonica's O2 (TEF.MC) - and now has 700,000 customers on 4G, helping it to boost profit margins.
Analysts were expecting sales of 10.33 billion euros and EBITDA of 3.29 billion euros, according to a Reuters poll of eight analysts.
Orange shares have fallen 7 percent this year to close on Wednesday at 7.75 euros. In the same period, the European telecom index .SXKP has risen 9.5 percent. ($1 = 0.7555 euros)
(Additional reporting by Cyril Altmeyer; Editing by Christian Plumb and David Goodman)