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France Telecom Offloads Etrali

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Etrali, a trading solution from Orange Business service of  France Telecom (FTE) has been acquired by The Gores Group – a U.S. based global private equity firm. The trading solution will now be a new business entity with Etrali Trading Solutions as its brand name. The financial details of the deal remain undisclosed.

We see this divestiture as a strategic move by France Telecom to right size its European business,  especially in the struggling market of its home turf. This will in turn draw significant financial synergies that would negate the revenue and EBITDA headwinds of the company to some extent.

France Telecom continues to register average revenue per user (:ARPU) erosion in its wireless services. The company expects ARPU to decrease in the range of 12–13% in fiscal 2013, mainly due to stiff competition in the French telecom market. We believe the rollout of attractive 3G plans by Paris-based broadband service provider, Iliad SA, has resulted in continued revenue erosion for the company.

Iliad SA made its debut in the beginning of 2012 with service plans costing as low as $2.6 per month. So, to counter such threats and retain subscribers, FTE slashed its service rates, and ended up with declining revenues.

In response to that, Iliad further reduced its service rates, thus triggering subscriber loss for France Telecom. Further, France Telecom is facing tough competition from Bouygues, SFR, Telecom Italia and Vodafone Group (VOD) in its domestic operations, which account for more than half of its revenues and profits. This has resulted in France Telecom losing its market share and recording lower margins and profitability.

However, at present, Orange Business Services is one of the profitable business units for France Telecom. It has more than 100,000 customers all over the world. Orange Business service is expected to deliver more than 10% growth per year through 2016. We believe that growing market demand for business service products will allow France Telecom to offset its declining wireless business and capitalize on the opportunities in the cloud-based security market.

France Telecom, which operates with Telefonica SA (TEF) and Telecom Italia S.p.A (IT) currently carries a Zacks Rank #4 (Sell).

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