Ten years ago, I bought shares in Orange (the mobile business) and France Telecom (the parent of Orange), which are now one and the same company. I made two mistakes at the time:

• After France Telecom’s share price had gone down by more than 80%, I thought that it was strongly protected against further price decrease, and would go up over the long term. It didn’t.
• Even if profit margins in France were to decrease under competitive pressure in the fixed line business, I thought that France Telecom’s turnover would go up, driven by mobile services and the international business. It didn’t either.

So I was double wrong. And this is what happened to my original investment. Not a disaster, but certainly not great. Time to fire France Telecom?

To put things in perspective, and also to explain why Orange’s share price went down over the last 10 years, the following table summarises how Revenues, EBITDA and EBITDA margins evolved at Orange (France Telecom), Deutsche Telekom (DTAG), Vodafone and Orange’s French challenger Iliad over the period 2013-2013.

At Orange, not only did EBITDA margin decrease from 38% to 31% between 2003 and 2013, but turnover also decreased from €46bn to €41bn. DTAG and Vodafone profit margins have also been under pressure, but at least they managed to grow their turnover.

When a company’s profit and its turnover go down, you would expect its management team to be under massive pressure from shareholders to turn the situation around, wouldn’t?

Wrong again, and this it the third mistake that I made. I simply forgot that Orange is not quite a ‘normal’ company: the French state still owns 27% of the shares, and strongly influences its course. And when you are a semi-governmental company in France, managing shareholders expectations appear to be secondary to managing the expectations of other stakeholders.

Flashback

Back in 2001, I bought shares in Orange. This was on the 13^th February 2001, and I paid €9.5 per share, for a total of €2375 (250 shares). As did millions of other shareholders on that day, as Orange was listed in an IPO on the Euronext Paris stock exchange. France Telecom, its parent, had bought the British mobile network operator Orange plc the year before; and this was a time when fixed line operators found it fashionable to spin off their mobile business and list them as separate entities.

In the meantime, the price of the France Telecom share plummeted from more than €90 per share in early 2001 to €20 per share in the spring of 2002. This is when I thought that the price could not really go down much further (it has already gone down by 80% within a 1 year period). France Telecom was after all the incumbent in France with a quasi monopoly in the fixed line business, and solid, recurrent cashflows. Wrong! The price of France Telecom shares has never really gone up much higher than €20 since then, and has been in limbo at around €10 for years now.

In November 2003, France Telecom probably realised that it needed a growth story, and as was fashionable then, decided to remerge with its mobile subsidiary Orange, offering 11 France Telecom shares for 25 Orange shares. So my 250 shares in Orange were turned into 110 shares in France Telecom. So at end 2003, I ended up with 110 France Telecom shares paid €2375 in February 2011 (€21.6 per share) and 94 France Telecom shares paid €1880 in May 2002 (€20 per share), giving a total of 204 shares paid €4255 (but worth €4080 in November 2003). 10 years later, in May 2013, France Telecom was rebranded Orange. During that period, I received net dividends (after tax) of about €2300. But as at 23 April 2014, a share in France Telecom is only worth €11.06, giving my shares a value of about €2256 only.

In February 2002, I also bought €4000 of shares in Vodafone, and €4000 in Deutsche Telekom. And have held them since that day. These provide interesting benchmarks, as shown in the following exhibits.

Summa Summarum

France Telecom has distributed strong dividends over the period 2003-2013, but its share price also went down by 45% over the period – hardly surprising as its revenues went down by 11% and its EBITDA decreased by 27%.

Although the performance of France Telecom for its shareholders is a clear disappointment, you shouldn’t sell (or buy) shares with a rear-view mirror bias, but based on what you think will happen in the future.

Having said that… unless you have reasons to believe that France Telecom will be managed differently in the future by its CEO Stéphane Richard and its management team (and the French state), it might be time to sell your France Telecom shares, if you have any. And reinvest the proceeds in other telecoms companies whom you predict a brighter future, and more freedom to manage performance, as they should.