France Telecom's new CEO faces tough road ahead

France Telecom's incoming Chief Executive Stephane Richard faces serious challenges in the group's home market and analysts hope his political connections will help revive the company's flagging fortunes.

The 48-year old executive, who recently held a key post in France's Finance Ministry, has the tough task of reassuring investors in Europe's third-biggest telecom operator at a time when its shares are underperforming rivals.

When he takes over on March 1, he must also manage the aftermath of a series of worker suicides that limit his ability to cut costs, while opportunities for growth are limited.

"There is no magic wand," said Antoine Pradayrol, analyst at Exane BNP Paribas.

"The French market in both fixed and mobile is tough and getting more competitive, and Stephane Richard's arrival cannot change that. France Telecom's revenues are just not going to grow," he added.

But, in the telecoms business - similar to the energy and the healthcare sectors - regulatory and political decisions have a huge impact on profitability and Richard's familiarity with the halls of power can only help, say analysts.

Richard, who made a fortune at a real estate group in the 1990s and has held high-ranking jobs at companies like Veolia and Vivendi that require political ties, is seen by many French executives, bankers, and investors as being close to President Nicolas Sarkozy.

"Whether historical telecom incumbents like France Telecom and Deutsche Telekom make money is largely up to political and regulatory authorities," said Robin Bienenstock of Bernstein Research.

Few analysts expect France Telecom's key financial parameters to change, namely the goal to generate 8bn in free cash flow in 2009-2011, and the dividend policy. Richard has already signalled his scepticism about big cross-border acquisitions. That should reassure investors who have feared that France Telecom would engage in value-destructive deals ever since its failed bid for Nordic telecom operator TeliaSonera in 2008.

But Richard is likely to want to find ways to address the fact that France Telecom has been battered on the stock markets in the past year, according to a person close to the situation.

That could mean a series of moves, such as laying out a strategy to invest in fibre broadband, detailing how it will confront the arrival of a fourth mobile phone operator, and tweaking the previous CEO's approach of seeking additional revenues in content and services.

The goal is to convince investors that France Telecom is capable not only of generating the promised free cash flow, but also grow in the medium and long-term.

France Telecom shares have sunk nearly 5 percent in the past twelve months while the Dow Jones Telecom Index climbed about 9 percent. It was the second-worst performer on the French CAC 40 Index last year.

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Analysts also hope that Richard's political background will be good for France Telecom's bottom line.

Before arriving at France Telecom last summer, Richard was the chief of staff for France's Finance Minister Christine Lagarde and he served as an independent member on France Telecom's board from 2002-2007.

Multiple key regulatory rulings went against France Telecom last year.

These included the approval of a fourth mobile phone competitor, a requirement to share fibre broadband infrastructure with rivals, and a decision to end France Telecom's exclusivity on the iPhone.

"There have been so many regulatory decisions that have been unfavourable to France Telecom lately that Stephane Richard's arrival comes at a time that the balance could tilt the other way," said Stéphane Beyazian, analyst at Raymond James Euro Equities.

Another key decision looms: France Telecom has asked the government to increase the rate at which it rents out the last part of its phone lines to it competitors by as much as one euro per month.

The seemingly arcane regulatory change could boost France Telecom's operating profits by up to €100m per year, according to analysts.

"It would be great if someone could pick up the phone and call Nicolas Sarkozy or Christine Lagarde about that," remarked one analyst.