Sales Surge as France Telecom Continues Foreign Expansion

France Telecom (FTE) reported surging nine-month sales Tuesday, as the former state-run French monopolist continued its push to become a force in global telecommunications.

Spurred by strong revenue growth in its wireless and overseas units, sales increased 22% to 24.0 billion euros ($20.7 billion) from 19.7 billion euros in the same period last year.

Whereas international revenues spiked 135% for the first nine months of 2000, revenues in France increased a paltry 6.6%. A 44.6% jump in sales from its domestic mobile unit helped offset a 3.4% drop in the company's domestic fixed-line revenues. After investors digested the figures, France Telecom's shares closed down 0.30 euro, or 0.3%, at 119.70.

Like most of Europe's incumbent telcos, France Telecom has had to branch out internationally as ever-increasing domestic competition eats into once secure and fat margins. While France Telecom still retains more control over its home market than either Deutsche Telekom(DT) or British Telecom(BTY) do in their home markets, it has recently splashed out over 50 billion euros -- most notably on wireless operator Orange -- to expand beyond its boarders.

The need to increase business outside of France and concentrate more on wireless instead of traditional fixed-line services will become even more important next year when the company will lose its monopoly on local calls. To try and stem the flow of customers, France Telecom announced over the weekend it would lower local telephone rates for the first time in three years. However, according to the French regulator, France Telecom's tariffs will still remain considerably higher than other former European monopolies.

Although likely to continue getting squeezed back at home, France Telecom's recent adventures abroad have been successful enough to assuage the worries of some shareholders. Over the past year, France Telecom has impressively cobbled together the No. 2 wireless operation in Europe, second only to the U.K.'s Vodafone(VOD).

With Orange and German partner MobilCom(MBLCF), the French have secured third-generation wireless licenses in the big key markets of Britain, Germany and Italy. And since France is running a 3G beauty contest where it will pick the operators it deems fittest, France Telecom is almost certain to garner a French license as well.

That will put France Telecom in a much stronger position than either BT or Deutsche Telekom, both of which are struggling to piece together a pan-European wireless network.

"If you look at [France Telecom's] strategy compared to Deutsche Telekom, they've done fairly well," says Graham Johnson, an analyst for HSBC in London. "They've probably got one of the best strategies of any of the incumbents, although with a valuation to match." HSBC rates France Telecom shares an "add" and does not have an investment banking relationship with the company.

Johnson thinks the best way to buy into France Telecom is to wait for the initial public offering of the firm's newly combined mobile unit under the moniker New Orange early next year. However, before France Telecom can float off its wireless operations, it will have to allay concerns that Orange's highly popular CEO Hans Snook is planning on giving up the helm because he is chafing under the France Telecom yoke.

Snook's departure naturally wouldn't change the merits of Orange's current business, but it could cloud investor expectations about its future prospects. On Tuesday, the company again denied rumors Snook was stepping down, but only time will tell whether the unconventional executive gets the level of autonomy he deems necessary from the still rather monolithic France Telecom.

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