Case study: France telecom

Résumé du document

The French government created France Telecom in 1988. The company was privatized in 1997, and in the following year lost the state monopoly as the telecommunications industry opened up to competition.

Given the context, the company then began to expand through a number of partnerships and acquisitions. The Global One partnership formed in January 1996 with Sprint (US) and Deutsche Telekom created an international communication network which was fully acquired by France Telecom in 2000. Growth continued in July 1999 when France Telecom acquired an equity interest in British cable operator NTL. This was followed in October 1999 by France Telecom's launch of its European Backbone Network.

The company expanded into the Internet in 1998 with the development of Wanadoo. In 2000, Wanadoo extended its operations into the UK, buying leading ISP Freeserve. The company also operates in Denmark, Spain, Belgium and the Netherlands amongst others.

France Telecom made a major expansion in the mobile market in June 2000 by acquiring UK-based mobile operator Orange. The acquisition completed the company's interests in mobile companies and made it one of the largest mobile providers in Europe.

Our analysis will focus on the cash flows generated by France Telecom during two periods [from 2000 to 2002] and [from 2008 to 2010]. What was the financial situation at the end of 2002 and 2010?
 

Extraits

[...] This was followed in October 1999 by France Telecom's launch of its European Backbone Network. The company expanded into the Internet in 1998 with the development of Wanadoo. In 2000, Wanadoo extended its operations into the UK, buying leading ISP Freeserve. The company also operates in Denmark, Spain, Belgium and the Netherlands amongst others. France Telecom made a major expansion in the mobile market in June 2000 by acquiring UK-based mobile operator Orange. The acquisition completed the company's interests in mobile companies and made it one of the largest mobile providers in Europe. [...]

[...] So France Telecom's activities become almost paralyzed. The stock value of the company and its market capitalization collapses. An encouraging thing is that France Telecom generated a large amount of funds from its operations millions) in 2002, mainly thanks to fixed assets depreciations and provisions. The funds from operations represented more than of the operating cash flows in 2000 and in 2001. The operating cash flows only improves when we have : - An increase in self-financing capacity (this increase must be higher than the increase in working capital requirements) - A decrease in Working Capital Requirements (this decrease must be higher than the decrease in self-financed capacity) - An increase in self-financing capacity and a decrease in WCR simultaneously The operating cash flows remain positive over the three years. [...]

[...] This decline in net interest expenses can be explained by the decrease in short-term financial debt, which was significantly higher than the increase in long-term debt. In addition, the fact that short-term debt has generally higher interest rates than long-term debt leads to an even greater decline in net interest expenses as a result of the decrease in short-term debt issuances. In 2008 and 2009 there was no leverage effect since the ROE of the company was lower than its ROA. [...]

[...] The cash flow statement is a complementing tool, in combination with the balance sheet and income statement. The cash flow statement records the amounts of cash and cash equivalents entering and leaving a company. It allows investors to understand how a company's operations are running, where its money is coming from, and how it is being spent. So the cash flow statement is certainly a useful financial tool and not an exhaustive one. In the second part of his report, the trainee says “Between 2000 and 2002, the company's profitability was very high, as shown by its self-financing capacity”. [...]

[...] The Orange's episode created a deep disenchantment between France Telecom and public investors. Nevertheless, the profitability of the core business activities gives an optimistic signal for the future. [...]