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1.1 ± Company Details

France Telecom Group (France Telecom) is one of the leading providersof telecommunication services, worldwide. The company is engaged inoffering services covering fixed and mobile communications, data

transmission, the Internet and multimedia, and other added -value services for individuals, businesses and other telecommunications and operators. FranceTelecom offers its services under three principal segments, namely, PersonalCommunication Services, Home Communication Services and EnterpriseCommunication Service. Various services offered by the company includenetworks, security, telephony, collaboration, mobility, applications,professional services, and large projects management. The companyprincipally operates in France, the UK, Spain and Poland. As of December 31,2008, the company had 26.7 million broadband customers, 12.7 million ADSLbroadband customers in Europe, 6.5 million voice over IP customers and 2.1million IPTV customers. Also, it had more than 182 mill ion customers aroundthe world. The company is headquartered in Paris, France. The company

reported revenues of (Euro) EUR 53,868.00 million during the fiscal year ended December 2008, an increase of 0.88% over 2007. The operating profitof the company was EUR 10,272.00 million during the fiscal year 2008, adecrease of 4.88% from 2007. The net profit of the company was EUR4,069.00 million during the fiscal year 2008, a decrease of 35.41% from 2007.The Company operates a number of subsidiaries, notably un der the brandname Orange (Nexis, 2010). The company headquarters are based in Parisand below is the full contact information for France Télécom.

Head Office France Télécom6 Place D¶Alleray

75505 Paris Cedex 15France

Telephone +33 1 44 44 22 22 Fax +33 1 44 44 80 34 Web Address www.FranceTelecom.fr



1.2 ± Organisation History

Up to 1988, France Télécom was known as the Direction Générale des

Télécommunications, a division of the Ministry of Posts andTelecommunications. By the 1990s, France's 100 percent digital phonesystem was among the most modern in the world. Yet events in thetelecommunications world would soon overtake the company, and itsmonopoly--and the burdens of bureaucracy soon left the company strugglingto catch up to the rest of the worldwide industry, already undergoing aprocess of deregulation and privatization that would transform the nature of the telecommunications business. Eyeing the success of other recently de-nationalized telephone providers, particularly the British system, renamedBritish Telecom; DGT adopted a new name, France Télécom, giving it at leastthe appearance of keeping up with modern industry trends. (FundingUniverse,2010)

The company was privatized in 1997, and the following year lost the

state monopoly as the telecommunications industry opened up to competition. After this the company began to expand through a number of partnershipsand acquisitions. The Global One partnership formed in January 1996 withSprint (US) and Deutsche Telekom, this created an internationalcommunication network and was fully acquired by France Telecom in 2000.Growth continued in July 1999 when France Telecom acquired an equityinterest in British cable operator NTL. This was followed in October 1999 byFrance Telecom's launch of its European Backbone Network.

The company expanded into the Internet in 1998 with the developmentof Wanadoo. In 2000, Wanadoo extended its operations into the UK, buyingleading 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 June2000 by acquiring UK-based mobile operator Orange. The acquisiti oncompleted the company's interests in mobile companies and made it one of the largest mobile providers in Europe.

Wanadoo has since launched its own growth plan. In late 2000 itacquired Marcopoly, a website selling household electronics and appliances .It also purchased Librissimo, a publisher of facsimiles of antique and out of print books. (DataMonitor, 2002)

1.3 ± Organisational Structure

On the next page is a diagram showing the various departments andmanager levels within France Telecom.



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1.4 ± Main Products/Services Provided

France Telecom S.A. provides consumers, businesses and other telecommunications operators with a range of services, including fixedtelephony and mobile telecommunications, data tr ansmission, Internet andmultimedia, and other value-added services. The Group reports sevenoperating segments: France, United Kingdom, Poland, Spain, Rest of theWorld, Enterprise and International Carrier and Shared Services (IC & SS).On April 29, 2009, the Company acquired additional 18.36 % interest in FTEspana. (Reuters, 2010)

According to their website (2010), Orange is the key brand of FranceTelecom, one of the world¶s leading telecommunications operators. With131.8 million customers, the Orange brand now covers internet, television andmobile services in the majority of countries where the Group operates. At theend of 2009, France Telecom had consolidated sales of 50.9 billion euros,including its activities in the United Kingdom, and at 31 December 2009, theGroup had a customer base of almost 193 million customers in 32 countries.These include 132.6 million mobile customers and 13.5 million broadbandinternet (ADSL) customers worldwide. Orange is the number three mobileoperator and the number two provider of broadband internet services inEurope and, under the brand Orange Business Services, is one of the worldleaders in providing telecommunication services to multinational companies.

In FY2008, the group operates through three business segments: personalcommunication services (PCS), home communication services (HCS), and enterprisecommunication services (ECS). Effective from January 2009, the group changed its segmentreporting from business segments to country based reporting structure.

The PCS segment includes the mobile telecommunications services of the group inFrance, the UK, Spain, Poland and other counties (rest of the world). The segment operatesthrough Orange subsidiaries in France and the UK; and France Telecom Espana in Spainand PTK Centertel in Poland operating under the Orange brand. The segment's rest of theworld operations include wholly owned subsidiaries in Belgium (Mobistar), Romania, SlovakiaSwitzerland, Moldova (Voxtel), Botswana, Cameroon, Ivory Coast, Madagascar, Dominican



Republic, Senegal (Sonatel Mobiles), Mali (Ikatel), Jordan (Mobilecom), Guinea Bissau,Guinea, Central African Republic, Niger and Kenya (Telkom Kenya). Rest of the worldoperations also include majority owned subsidiary, Mobinil (71%), in Egypt and minorityinterests in Mauritius Equatorial (40%) and Guinea (40%) at the end of FY2008.

The PCS segment offers services are based on GSM (global system for mobile), GPRS(general packet radio services), EDGE (enhanced data rates for GSM evolution), UMTS

(universal mobile telecommunications system) and HSPDA (high speed downlink packageaccess) technologies. At the end of FY2008, the PCS segment served 182.3 millioncustomers worldwide, compared to 170.5 million customers in 2007.

The HCS segment includes the fixed-line telecom services including fixed line telephony,internet services and services to operators, in France, Poland and rest of the worldoperations. Rest of the world operations include the company's presence outside Europe inLatin America, Asia and Pacific, and Middle East and Africa. The group divested most of itsinvestments in Latin America, and Asia and Pacific in recent times. Its operations in AsiaPacific include 50% shareholding in Vanuatu Telecom. In Middle East and Africa, itsoperations include investments in Ivory Coast through 51% controlling interest in Cote d'IvoireTelcom, the incumbent telecommunications operator in the Ivory Coast; 42.3% of the capitalof Sonatel, the incumbent telecommunications operator in Senegal; shareholding of 51% inJordan Telecom Company, provider of fixed-line telephony and internet services; 40% of

Mauritius Telecom, the incumbent operator in Mauritius; and an 51% interest in TelkomKenya, an incumbent operator in Kenya.

At the end of FY2008, the segment served over 46.8 million fixed lines and 13.8 millioninternet customers, including 12.7 million broadband customers.

The ECS segment offers business solutions and communication services to Frenchenterprise and global business services to companies marketed under the Orange BusinessServices brand. The segment includes ECS and its subsidiaries (Etrali, Setib, CVF, ExpertelConsulting, Almerys, Neocles, Silicomp, GTL, EGT, Solicia, Data & Mobile); business-customer distribution; and Orange Business Solutions (mobiles).

Orange Business Services offers traditional services as well as related IT services inareas such as call- center services, and horizontal or vertical applications. Its services includefixed-line telephony and traditional data services, enhanced network services, integration andoutsourcing of critical communication applications, and other business services.

Its integration and outsourcing of critical communication applications services include onsite integration services and outsourced communication applications including customer relationship management (CRM), IT services, collaborative services (messaging andconferencing solutions), consulting and support services and network-related value-addedservices. IT services include remote management and administration of companyapplications; service for hosting, managing and securing company servers; service for systems integration and specific application development; and multimedia disseminationsystems, such as the management and broadcasting of video content on remote screens.

Orange Business Services's other business services include broadcast services, and

equipment sales and leases. The group provides broadcast services through its subsidiaryGlobeCast. GlobeCast's services are accessible worldwide through 11 technical centers and

18 offices located in Europe, America, Asia, Africa, the Middle-East and Australia. GlobeCasttransmits video and multimedia content on its satellite and optical fiber network on behalf of television and radio broadcasters, businesses, government institutions and point-of-salenetworks. The company offers services for digitization, aggregation, transmission andreformatting of content on all types of networks and platforms, including satellite television,digital terrestrial television, cable networks, video on mobiles, IPTV and dynamic audiovisualdisplays.

From the start of FY2009, the group is operating under seven segments: France, UK, Poland,Spain, AMEA (Africa, Middle East and Asia), EME (Europe and Middle East), enterprise, and



international carrier and shared services (IC & SS). The group's AMEA and EME segmentsare grouped as rest of the world operations.The group's France, UK, Poland and Spain segments and rest of the world operations providemobile telephone handsets and networks, and fixed-line telephony, internet services andcarrier services in their respective markets. Rest of the world operations provide theseservices in Belgium, Botswana, Cameroon, Cate d'Ivoire, Egypt, Mauritius, Jordan, Kenya,Madagascar, Mali, Moldavia, Senegal, Dominican Republic, Romania, Slovakia and

Switzerland.The enterprise segment provides communication solutions and services for businesses inFrance and other regions. The IC&SS offers services including deployment of theinternational and long-distance network, installation and maintenance of submarine cables,and sales and services to international carrier. It also offers shared services including thesupport and cross-divisional functions across the entire group and the new focus areas(content, health and online advertising). (Datamonitor, 2009)

1.5 ± Competitors

France Telecom faces intense competition in the many markets in which it operates. Competitionincreases the customer retention costs, lower prices and the need for capital expenditures. For instance,in the French mobile market competition further intensified as a result of the granting of a fourth 3G licenses as well as due to entry of new players from sectors such as internet players including Yahoo,Google, MSN and Skype. Rising competition will continue to affect the group¶s market share and revenuegrowth in coming years. (Datamonitor, 2010) France Telecom¶s main worldwide competitors include:

America Online, Inc. (AOL) ± An American Internet services and media company.

American Telephone & Telegraph Corp. - an American telecommunications company that provides

voice, video, data, and Internet telecommunications and professional servicesto businesses, consumers, and government agencies

BellSouth Corporation - an American telecommunications holding company based in Atlanta, Georgia .

Bertelsmann AG ± a transnational media corporation based in Germany.

Bouygues S.A. ± a French industrial group that has products in public works and infrastructure, real estatedevelopment, media and telecommunications services.

CANAL+ - French premium pay television channel similar to that of Sky in the UK which is owned by theVivendi Group.

COLT Group S.A. - a telecommunications company providing services to major city-based customers throughout Europe

Deutsche Telekom AG ± a telecommunications company headquartered in Germany. It is the largest telecommunications company in Europe after Vodafone.

Global Crossing Ltd. - a telecommunications company that provides computer networking servicesworldwide.

GTE Corporation -MCI Inc. - an American telecommunications subsidiary of Verizon Communications that is

headquartered in Virginia.

Olivetti S.p.A. - an Italian manufacturer of computers, printers and other business machines. This is a

subsidiary of Telecom Italia.

Portugal Telecom, SGPS, S.A. - the largest telecommunications service provider in Portugal .

Although it operates mainly in Portugal and Brazil , it has also a significant presence in Guinea-



Bissau, Cape Verde, Mozambique, Timor-Leste, Angola, Kenya, the People's Republic of China,

and São Tomé and Príncipe.

Due to its large market share, Portugal Telecom is considered a de facto monopoly in fixed telephony

in Portugal.

Sprint Corporation - is a telecommunications company based in Kansas. The company owns and operates the third largest wireless telecommunications network in United States, with 48.2 million

customers,[1] behind Verizon Wireless and AT&T Mobility.

Swisscom - major telecommunications provider in Switzerland . Along with Swiss Post , it is asuccessor company to the former state-owned PTT

Telecom Italia Mobile SpA - is Telecom Italia'smobile phone brand, and runs

a GSM , EDGE , UMTS and HSDPA network in Italy and Brazil . In Europe, TIM is part of the FreeMove alliance. This is an alliance of several European mobile telecommunications operators,designed to provide better service integration for its members' roaming customers.

Telefonica, S.A. - s a Spanish broadband and telecommunications provider in Europe and Latin

America. Operating globally, it is the third largest provider in the world, behind ChinaMobile and Vodafone.

Liberty Global - an international media company and one of the largest broadband providers outsidethe United States of America. It was formed by the merger of Liberty Media and UGC (UnitedGlobalCom).

Verizon Communications - an American broadband and telecommunications company

Virgin Media Inc. - a British provider of television, telephone and broadband internet services to

domestic and business customers in the UK

Vodafone Group PLC ± a British multinational mobile network operator and the world's largest

mobile telecommunication network company, based on revenue, with a market value of about £71.2 billion

MCI, Inc. - an American telecommunications subsidiary of Verizon Communications that is

headquartered in Virginia. The corporation was originally formed as a result of the merger

of WorldCom and MCI Communications. The corporation was purchased by Verizon

Communications in 2006, and is now identified as that company's Verizon Business division with the

local residential divisions slowly integrated into local Verizon subsidiaries.

1.6 ± Financial Analysis

The company recorded revenues of $63,886 million in the fiscal year ending December 2009,

a decrease of 14.1% compared to fiscal 2008. Its net income was $4,167 million in fiscal2009, compared to a net income of $5,658 million in the preceding year.

Below is a consolidated analysis of France Telecom¶s financial dealings from 2005 up

to and including 2009.





In the first half of 2010, France Telecom¶s operating income was 4.71

billion euros, down 6% on a historical basis (approximately -300 millioneuros). Reasons behind this include a 294 million euro decline in EBITDA anda 69 million euro deterioration in the share of income from associates.

France Telecom¶s consolidated net income for the first half of 2010 was3.3965 billion euros, compared to 2.76 billion euros in the first half of 2009, adifference and subsequent increase of approximately 1.2 billion euros.Reasons behind this include a 300 million euro decrease in operating income ,a 124 million euro improvement in net financial incom e generated by thedecrease in the cost of net financial debt. A 345 million euro decrease incorporate tax related to the reduction in deferred tax expenses. A 1.032 billioneuro increase in net income from discontinued operations related to the jointventure formed between Orange and T-Mobile in the UK. This joint venture iscalled Everything, Everywhere.

The France Telecom group had 2.74 billion euros worth of organic cash flow

in the first half of 2010. Excluding the 964 million euro payment made in the first half of 2010 related to the dispute over the special business tax assessment in France prior to 2003 and excluding the acquisitionspectrum and frequencies for 285 million euros, the Group¶s organic cash flow for the first half of 2010 wasdown 2.0% on a comparable basis to 3.989 billion euros ( -80 million euros). This was mainly due a 691 millioneuro decrease in the change in total working capital requirement, excluding an expense of 964 million euros in2009 linked to the dispute over the special business tax treatment in France prior to 2003. Secondly this wasdue to a 394 million euro decrease in accounts payable to fixed asset suppliers, excluding licenses, linked tothe decrease in CAPEX. (France Telecom, 2010)

At 30 June 2010, France Telecom had net debt of 29.892 billion euros, compared to 32.534 billion euros at 31December 2009. Net debt was reduced by 2.642 billion euros in the first half of 2010. This was related to organic cash flow generation of 3.989 billion euros 5 , minus the following items:- the payment of the balance of the dividend for 2009 to the shareholders of the parent company (0.80 euro per share), for a total of 2.117 billion euros;- dividend payments to non-controlling interests of 290 million euros; - acquisitions of spectrumand frequencies for 285 million euros; - acquisitions and sales of investment securities (net of cashacquired or transferred) and changes in ownershipinterests with no gain/loss of control amounting to 165 million euros;The ratio of net debt to EBITDA6 was 1.86 at 30 June 2010, compared with 1.95 at 31 December 2009.

Overall France Telecom has seen stable first half 2010 revenues compared with thefirst half of 2009, an improvement after the 0.9% downturn recorded in the second half of 2009. Taking intoconsideration these financial results and the current economic climate, France Telecom predicts the followingtrends for the remainder of 2010.

- revenues: excluding the impact of regulatory measures, revenues are expected to remain generally stable on a comparable basis in relation to 2009. The impact of regulatory measures for the year 2010 isestimated to be close to one billion euros.- EBITDA: the benefit of cost optimization programs and the lessened impact of regulatory measures in

the second half should partially offset the other factors eroding EBITDA margin and support commercial investments across our footprint. EBITDA margin erosion is thus expected to be a maximum of one point in2010.- maintaining the CAPEX rate at about 12% of revenues for the full year 2010, including a catch-up of investment in the second half and the restart of investment in fibre optics in France of about 100 million eurosin 2010.

- given this context, the Group confirms its target for organic cash flow generation of about 8 billion euros in 2010 and 2011, (before the acquisition of frequencies and spectrum for mobile services and excluding the impact on the 2010 accounts of the dispute related to the special business tax in France prior to2003 of 1.017 billion euros, including interest and other exceptional items),



NOTE: FULL FINANCIAL STATISTICS FOR FIRST HALF 2010 ARE AVAILABLE IN APPENDICES

1.8 External Factors

T ere are many different factors externally t at are going to impact on FranceTelecom¶s operations in t e future bot as oppurtunites and as potential t reats to t e

organisation. T e first of w ic being t e e- ealt sector. The global demand for the e-health sector is expected to be high in the coming years, which couldenhance the demand for the company's offerings. It is expected that, thespending in the health sector could increase by 4 to 5% per year in WesternEurope. Several factors influencing this demand are the increase in lifeexpectancy and the improvement in living conditions for the elder people.There is an increase in spending of 30 billion Euros a year for diabetes in theUS, and 170 billion Euros a year for cardiovascular diseases in Eur ope. TheUK is planning to invest nearly EUR 20 billion over 10 years, and EasternEurope would be investing EUR 270 billion. Moreover, there is need tomodernize health systems and relations between practitioners. Thehealthcare sector's need for the latest technology is an opportunity for the

company to expand its Orange Healthcare services and thus capitalize bybeing one of those that takes advantage of this.

Secondly, the French mobile market is growing rapidly, which couldenhance the demand for the company's offerings, thereby increase the topline growth. In 2008, ARPU of the French mobile market was higher than mostof the European countries including the UK and Germany. The subscriber base is also increasing. The number of unique mobile owners in Franceclimbed from 44.4 million in 2007 to 56.03 million by 2008, which is anincrease of around 303,700 subscribers. It is forecast that the wirelesspenetration levels will reach 96% in 2010 and total subscribers in France willincrease from 56 million in 2008 to 60.3 million in 2010. It is also estimated

that this trend could continue for the next decade. The growing mobile marketof France will stimulate the growth of the company.

Globally the telecommunication industry is in a consolidation mode, whichenables companies to strengthen and broaden their scope of operations. Italso enables the companies to develop, implement, and sharing newtechnology. A case in point is Verizon Wireless' acquisition of Alltel, andJapan's DoCoMo's acquisition of a stake in India's Tata Teleservices, even asBharti Airtel and MTN Group have been engaged in merger talks, andVodafone is eyeing the acquisition of UK operations of T -Mobile. Strategicinitiatives such as these would result in peers, which are financially andoperationally stronger, which may affect France Telecom's revenues andoperating results if it is unable to be part of such consolidation process andalliances.

The telecom and technology industry is characterized with intensecompetition, which could affect its business operations. The company facescompetition from international mobile operators like Verizon wirelesscommunications, Vodafone, Telecom Italia, Bouygues S.A., Telecom ItaliaS.p.A., AT&T Inc. Some of the competitors are recording a stro nger growth



and higher operating margin when compared with the company. The financialsuperiority of the competitors over the company will pose a serious threat toits growth and expansion plans. Moreover, the company also stands to loseits existing customers to its competitors. This intense competition could be athreat to the company, which adversely affects the operations and financialposition in the future.

The company has operations primarily in the Eurozone, where, analystspredict that the economic growth will decline from about 1.4% in 2008 to aslow as 0.2% in 2009. Specifically, the GDP growth in Sweden, Finland, andNorway, the company's key markets, is expected to decrease further by about4%, 2%, and 3% respectively. As mentioned earlier, the company derives themajority of its revenue from European nations and a slowdown in Eurozonecould affect its business adversely.

SWOT ANALYSIS

Strengths: European Market Leader The company enjoys a leadership position in most of the markets in which itoperates. France Telecom serves over 186 million customers across 30countries. The company's Orange is the key brand of France Telecom acrossInternet, television and mobile servi ces in most of the countries, it operates.The company also has 13.4 million broadband internet (ADSL) customers inEurope. The company is Europe's third largest mobile and leader inbroadband servicesStrong Margins and Returns The company recorded strong margins and returns in the fiscal year 2008,which helps the company strengthen its operations with better pricingstrategies and effective utilization of resources. The company's operatingmargin was 19.07% for the fiscal year 2008. This was above the In tegratedTelecommunications Services sector average* of 11.86%. A higher thansector average* operating margin may indicate efficient cost management or a strong pricing strategy by the company. However, the company's operatingmargin has declined 115 basis points (bps) over 2007 which may indicate thatthe company's cost management and pricing strategy is weakening.

Furthermore, its return on equity (ROE) was 14.7% for the fiscal year 2008.This was above the Integrated Telecommunications Services sector average*of 13.0%. A higher than sector average* ROE may indicate that the companyis efficiently using the shareholders' money and that it is generating highreturns for its shareholders compared to other companies in the sector.Strong Growth Prospects The company was trading at a price/earnings (P/E) ratio of 12.28 at the end of the fiscal year 2008. This was above the Integrated TelecommunicationsServices sector average* of 10.67. A higher than sector average P/E may



indicate that the company may have high growth prospects which arereflected in its stock's premium pricing. Investors may be expecting higher earnings growth in the future compared to other companies in the sector.Key Agreements France Telecom has entered into several agreements with diffe rentcompanies, which enable the company to offer value-added services to its

customers. On this line, the company has understandings with entertainmentcompanies such as Gaumont, Disney and MGM and Asterix, which arefacilitating the company to add new products to the company's video ondemand catalogue, in France. The company signed another agreement withMGM for the same purpose. This agreement covers regions such as Spain,Poland, the UK, and France. Moreover, in 2008, Lufthansa Systems, Lenovo, Airbus, Siemens, Primagaz and Disneyland Resort Paris entrusted thecompany with the management of all or part of their communication services.These agreements with global players could enable the company to enter intonew markets.Strong Innovative Community France Telecom has a strong and broad innovation community, which

includes around 5,000 people across four continents, including researchers,engineers and marketing specialists. The company has various researchcenters, and it established two centers in London and Warsaw in 2007, and in2008, the company opened Orange Lab Cairo. The efforts of these labs havebeen focused on voice services and access to content in Arabic. In March2008, the company started another research center in Jordan, comprising of 1000 people related to marketing, development and implementation. Thecompany opened another research center in the UK towards the end of 2008.The company launched new Unik, Fiber, the new Livebox ecosystem and theFlybox. The company has been launching its new products on an averageperiod of 6 to 18 months. During 2008, the company also introduced 3Gunlicensed mobile access platforms, and also launched fiber optic pilot inCatalonia. This enabled the company to garner an Innovation in InnovationManagement award from the Express-Expansion publishing group,BearingPoint, TNS Sofres and Ecole des Ponts. The award was given for thecompany's innovation structure and its work on La Cantine and idClicprojects.

Weaknesses: Limited Liquidity Position The company's current ratio was 0.58 at the end of the fiscal year 2008. Thiswas below the Integrated Telecommunications Services sector average* of 1.02. A lower than sector average* current ratio indicates that the company is

in a weaker financial position than other companies in the sector.Over Dependence The company's business operations are France-centric. During the fiscal year 2008, geographical contribution of revenues revealed the overdependence onFrance. The France region accounted for 53.4%, the UK region accounted for 11.41%, Spain accounted for 7.51%, Poland accounted for 9.61%, the Rest of Europe accounted for 9.62% and the Rest of the world accounted for 8.45%of the total revenues. Over dependence on a particular region could affect thecompany's operations, and financial position.















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