* Bouygues expects 2014 group sales down 1-2 pct
* H1 operating profit falls 61 pct to 134 mln euros
* Bouygues Tel EBITDA falls 29 pct to 332 mln euros (Adds context on French market, drop in bookings of new homes)
By Natalie Huet
PARIS, Aug 28 (Reuters) - French construction-to-telecoms group Bouygues lowered its 2014 sales forecast after a weaker than expected performance in the first half, hit by a price war in telecoms and a slump in public sector orders.
Bouygues, which posted a 61 percent drop in first-half operating profit excluding exceptional items, said on Thursday it now expected sales to be 1 to 2 percent lower this year, compared to a previous forecast of roughly stable revenue.
It blamed tough conditions in France, where a stagnant economy and austerity measures have weighed on public sector construction orders and prompted telecom rivals to slash prices in a battle to retain business.
However, the company confirmed its goal for slightly positive free cash flow this year at Bouygues Telecom, where it is losing mobile subscribers but striving to lure in new ones with cheap Internet, TV and home phone bundles.
Thanks to that strategy and an ongoing cost savings programme that includes 1,500 job cuts, Bouygues sees the unit returning to “significant” core profit growth from 2016.
Bouygues also said it was studying options to restructure the refined products operations of its road-building business Colas, with job cuts likely there too.
The owner of France’s third-largest telecom operator and TF1 , the country’s biggest private broadcaster, Bouygues has been slashing costs to cope with a bitter telecoms price war sparked by the 2012 launch of Iliad’s low-cost Free Mobile service.
The cut-throat competition has eroded profit margins and fuelled talk of consolidation among the country’s four mobile players, with Bouygues Telecom a potential takeover target since it lost a bidding war for bigger rival SFR in April.
Chief Executive Martin Bouygues played down market talk of further mergers and acquisitions in French telecoms, saying there had been no new developments in recent weeks.
Bouygues Telecom has been working to strengthen its future as a standalone player. It is cutting 17 percent of its staff while rolling out its very high speed 4G network and slashing prices in fixed broadband, which brought in 400,000 and 102,000 new customers respectively over the quarter.
However, Bouygues Telecom’s aggressive pricing strategy in fixed broadband did not bring in enough new clients over the period to offset the rise in related marketing costs and the switch of existing customers to its lower tariffs.
The unit’s earnings before interest, tax, depreciation and amortisation (EBITDA) fell 29 percent to 332 million euros ($438 million), as sales dropped 5 percent to 2.2 billion.
In its construction and road-building business, which accounts for around two thirds of revenue, Bouygues said it had seen orders fall 2 percent in France, though this was offset by a 9 percent rise abroad.
Like rival builders Vinci and Eiffage, Bouygues said French public-sector orders, especially at Colas, had dried up around municipal elections in March and the slowdown was “a point to watch” for the remainder of the year.
Chief Financial Officer Philippe Marien did not specify how many jobs would be cut at Colas, but said the division needed to cut staff at its Dunkerque site, which employs around 250 people.
Bouygues also saw bookings of new homes drop 23 percent in the first half. Martin Bouygues urged the government - freshly reshuffled and due to unveil a housing stimulus plan in the coming days - to bring confidence to buyers and investors tired of constant shifts in regulations and tax rules.
Bouygues’ operating profit fell 61 percent to 134 million euros in the first half - excluding a 308-million gain from the sale of a controlling stake in sports channel Eurosport - as sales edged up 1 percent to 15.18 billion. That compared with average estimates of 178 million and 15.07 billion respectively in a company-supplied poll of eight analysts.
Bouygues shares were down 0.5 percent at 1155 GMT, after falling as much as 2.8 percent in morning trade. (1 US dollar = 0.7572 euro) (Additional reporting by Gilles Guillaume; Editing by Pravin Char and Tom Pfeiffer)