Orange Telecom, a European giant

Benj Gallander, Ben Stadelmann, and Philip MacKellar
Wednesday October 17, 2018

A little more than five years ago, we penned a column on France Telecom, which traded as an American depositary receipt on the New York Stock Exchange and was acquired at $10.25 to $10.38 (all amounts in USD except where indicated). As we noted, its annual revenue was greater than that of BCE, Rogers Communications and Telus combined.

It remains an enormous company, though it is now called by another name: Orange. No, this has nothing to do with pumpkins.

Orange currently trades near $16, and there has been a generous dividend, which now yields better than 6 percent. But with our sell target at $27.74, the company has not performed nearly as well as we hoped. Hey, we’re not being greedy for anything close to the $178 level where it traded at the millennium. But what gives?

Revenue has remained remarkably stable: between $40 billion and $50 billion in 9 of the last 10 years. The corporation has remained profitable every year, and although the dividend is a bit less than half of what it was in 2012, it does remain handsome.

The debt load has remained steady, currently sitting at $33 billion or so, and the book value is a couple bucks shy of the trading price. The website is exceedingly popular, with 8.5 million unique visitors daily in France, placing it at No. 5 after Google, YouTube, Facebook and Apple. A pretty good company, to be sure.

Besides operating in France, Orange also has deep roots in other parts of Europe, Africa and the Middle East.

Management is trying to reduce costs. Over the past three years, headcount has been trimmed by about 2 percent annually. New self-serve software should enable more cuts in the customer-service department. “Bonjour, I am your friendly personal robot, Jeannie. How can I help you?”

One area that has been an obvious fail thus far is Orange Bank. André Coisne was hired to head this organization in 2016 after leading online banks for ING Direct and Crédit Agricole. Unfortunately, he could not replicate his success and was recently replaced by Paul de Leusse, another fellow with an impressive CV. Will he fail, too?

Certainly, the departing Coisne will fare better than former Orange chief executive Didier Lombard, who signed on in 2005 and is on trial, along with Orange, for “moral harassment” after more than 30 employees died by suicide between 2008 and 2010 when he was leading a restructuring. That process was called off in 2009, and Lombard vacated the position in 2010. Orange has rejected the allegations and Lombard has denied any wrongdoing.

The company is trying to move ahead more successfully in other areas. This summer, it took over Basefarm Holding, considered to be a leader in cloud-based infrastructure and services. Last year, the enterprise had more than €100 million (CAD$150 million) in revenue and it has been growing solidly.

Meanwhile, the corporation is taking advantage of low interest rates and its credit rating, which has been triple-B-plus since June, 2015. It recently sold €800 million (CAD$1.2 billion) of notes due September 2025, and €1.2 billion (CAD$1.8 billion) of notes due 2030. The respective interest rates are 1 percent and 1.875 percent. It does not get much better than that.

The potential for Orange to prosper seems very reasonable. If the upside we see is realized, it could prove spectacular. It is doubtful that this will turn into a lemon.