February 21, 2018 / 8:00 AM / 7 months ago

UPDATE 3-Orange starts to reap rewards of French investment

* Confirms targets for 2018

* Says no plans to pursue major merger deals

* Increases dividend to 0.70 euro/share for 2018

* Company boss Richard wins new mandate (Adds background, comparisons)

By Mathieu Rosemain and Gwénaëlle Barzic

PARIS, Feb 21 (Reuters) - Orange’s high investments started to bear fruit in France last year, capping a challenging period for the telecom operator in the face of a price war waged by younger rival Iliad in its home market.

The company said the return to annual growth in its home country — the first time since 2009 — vindicated its strategy.

Under boss Stephane Richard, awarded a third four-year contract on Tuesday, it has shied away from costly sports rights auctions, betting instead on the rapid expansion of fibre optic broadband network to ensure higher and recurring revenue.

This is in stark contrast with other telecom groups such as Britain’s BT and Altice’s French unit SFR.

Chief Executive Richard told analysts that the group had no plans to merge with a rival in Germany or expand in another country in Africa.

Merger talks took place last year between the former monopoly and Deutsche Telekom but fizzled out because it was not feasible to put the companies on an equal footing, a source said in January.

“There is no hidden agenda, there is no hidden project, there is no hidden negotiation with anybody,” Richard said.

“Neither with the Germans, nor with the Africans, nor with anybody else,” he added.

Richard also ruled out the possibility that Orange could lead the potential new round of talks between French telecom operators, to cut the number of players from four to three.

RACE TO FIBRE OPTIC

Orange’s heavy spending to accelerate the roll-out of high-speed fibre optic broadband infrastructure in France has been backed by French authorities for several years, leading to improvements in the country’s ranking by the Fibre to the Home (FTTH) Council Europe, an industry lobby.

France ranked a notch above the European Union average as of September 2017, with a household penetration of close to 15 percent.

More recent data provided by French telecoms regulator Arcep indicated that, as of the end of November, more than a quarter of French households had access to FTTH technology.

This is far above Germany’s levels, with a penetration rate of less 3 percent, according to FTTH Council Europe.

That situation has prompted German industry to voice fears that it could back Europe’s largest economy.

Bernstein analyst Dhananjay Mirchandani echoed that concern shortly after Telefonica Deutschland reported good fourth-quarter results on Wednesday, pointing to a general lack of investment on networks.

“A headline beat and resilient net adds were reassuring, but it will take more than this to address our core concern on the business: a consumer perception of poor network quality,” Mirchandani said.

“A clear risk of underinvestment in the network leaves us cautious.”

SPAIN SHINES TOO

Orange, Europe’s fourth-biggest telecoms operator by market capitalisation, trades at 12 times estimated 12-month forward earnings against 12.8 times for Deutsche Telekom, 20.9 times for Vodafone and 10 times for Telefonica.

Orange shares traded 0.7 percent higher by 1500 GMT.

Growth in Orange’s annual sales helped to lift operating earnings and convince management to increase the annual dividend for 2018 by five cents.

Fourth-quarter results were in line with expectations, with core operating profits growing by 2.5 percent to 3.22 billion euros.

The group confirmed its targets as laid out at its investor day last December, including growth in its adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) for 2018.

Spain, Orange’s second-biggest national market after France, was a big contributor to profits last year, with adjusted EBITDA jumping by 17 percent.

As in France, the efforts made on cost savings and the customers’ shift toward the more profitable fibre optic technology for their broadband connection drove higher results. ($1 = 0.8113 euros)

Editing by Sudip Kar-Gupta/Keith Weir

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