Slowly but surely, French telecoms group SFR is crumbling. Destabilised after rival telecoms firm Free was handed France’s fourth mobile phone operating licence in 2012, SFR now appears to be on a path of inexorable decline since it was purchased from Vivendi by Franco-Israeli businessman Patrick Drahi in November 2014.
In the second quarter of this year, SFR lost 257,000 private and professional subscribers to its landline and mobile phone services, according to a statement released on August 9th. In the space of a year, the total number of its subscribers has fallen from 17.4 million to 16.64 million, which is proportionately more than any of its rivals. The group saw a - 4.2% year-on-year fall in turnover over the first half of 2016, down to 5.3 billion euros, while earnings before interest, taxes, depreciation and amortization (EBIDTA) – around which SFR has built its financial strategy – also fell by 7.6% to 1.84 billion euros.
The financial and commercial difficulties appear to justify the group’s recent announcement that it is to shed 5,000 jobs, representing a third of its staff, over the next two years. An agreement was reached on August 4th with the CFDT and UNSA staff unions that the jobs will be lost on a basis of voluntary redundancy scheme estimated to cost between 600-800 million euros, and which is expected to cut the group’s costs by 400 million euros in 2018.
However, appearances are one thing. For the question is raised as to whether SFR owner Patrick Drahi’s strategy of crudely reducing costs - adopted straight after his purchase - is not one of the reasons, and possibly the principal one, for the loss of customers. In which case, to continue with that strategy will inevitably lead to more financial woes.
Enlargement : Illustration 1
In May last year, Drahi, 52, justified the hard line he adopted when he took over the reins of SFR by telling the French parliament’s economic affairs commission that the group, when owned by Vivendi, was akin to a little “rich girl living off her father”. He told the commission that the cut-throat telecoms market in France, reputedly the toughest in Europe, allowed no room for frivolities.
The French market became a particularly hard-fought one after the granting in 2012 of a mobile phone licence to Xavier Niel’s internet services provider Free, which has use until the end of 2016 of the infrastructure belonging to Orange (former France Telecom). At the time, the head of France’s Regulating Authority for Electronic Communications and Post (ARCEP), Jean-Ludovic Silicani, hailed the increased competition as a driver of new technologies and development of the mobile phone market.
Economists Augustin Landier and David Thesmar, who respectively teach at the Toulouse School of economics and the HEC school in Paris, backed Silicani’s forecast in a study commissioned by Free which they co-authored. They estimated that the arrival of Free on the mobile phone market would create 16,000 jobs in the short-term and 30,000 jobs in the long-term.
Meanwhile, Bruno Deffains, a lecturer in economics at Paris-II-Panthéon university, was sued by Xavier Niel for “denigration” following the publication by financial daily Les Echos of an article written by Deffains in which he predicted that Free’s arrival as the fourth mobile operator in France would lead to 70,000 lay-offs and unprecedented asset losses. As a result of the lawsuit issued by Niel, police accompanied to Deffains’ home an IT expert sent to study his computer.
Four years on, an estimated 15,000 jobs have been lost in the mobile sector, not counting the disappearance of sales points, franchised dealers, and sub-contractors. For all of the mobile operators have had to align themselves with the norms laid down by Free, reducing their costs, quietly axing jobs. A monthly subscription of 20 euros has become the reference price in France.
SFR had of course adopted the same strategy before its acquisition by Drahi, but since then it has an added disadvantage against its competitors - which is to find the financial resources to pay the debt of the purchase, and to provide its proportionate contribution to paying off the global debt of its parent company Altice. Its owner, Partick Drahi, has long financed the construction of his business empire through credit, using the leveraged buyout technique, by which debt is used to buy and restructure a company, before cutting its costs to raise cash to pay back the borrowed money.
‘Unprecedented’ customer dissatisfaction
As of the first few months following the acquisition of SFR by Drahi, the group’s staff had understood they were in a new corporate landscape. All the Reasearch and Development budgets were reduced, while the company’s organization was revised and projects overhauled. Sub-contractors were confronted with huge delays in payment, to the point that the French economy and finance ministry last year fined both SFR and Numéricable, also owned by Drahis’s holding company Altice, for overstepping the legal 60-day limit for the payment of service providers. In the United States, the staff at Suddenlink Communications, recently bought by Altice, are in turn discovering the unusual cost-cutting methods favoured by Drahi.
The Drahi methods, which target savings on just about every detail of a company’s activities, including the water cooler, has seen a spectacular rise in SFR’s financial resources. In 2015, its cash flow rose to 3.1 billion euros, compared with 893 million euros in 2014. Net income was transformed from a loss of 188 million euros in 2014 to a profit of 675 million euros last year. But this was not enough for the parent company; since 2013 SFR no longer paid dividends, but it was to find 2.5 billion euros to pay the dividends which Altice was impatient to receive to in turn honour its debt. Faced with the difficulty of further increasing its debt of 14.6 billion euros, SFR chose to decapitalise and draw on the sum from its equity.
Such financial sleight of hand was seen as a temporary manoeuvre while waiting for the French telecoms market to settle down. But the mobile phone market has still not found the consolidation promised by numerous experts. In the summer of last year, Drahi attempted to force the situation by offering Martin Bouygues, CEO of construction group Bouygues, a payment of 10 billion euros for his telecoms subsidiary Bouygues Telecom which is regarded as the weakest of mobile operators. But Bouygues turned down Drahi’s offer. Last winter, it was the turn of Orange to try and buy out Bouygues. While the negotiations spread over several weeks, SFR, Free and Orange examined the terms of how they would carve up the Bouygues infrastructure in the return to a market of just three operators. But the negotiations with Bouygues again resulted in failure, notably because of the French government’s refusal to allow Bouygues its demanded share of Orange’s capital, which is partly state-owned. Thus the operators are faced with continuing with their fratricidal competition, at least for the near future;
Drahi’s plans have gone awry. SFR, which was intended to serve as a cash cow for his business empire - which, since the purchase of Suddenlink and Cablevision Systems Corporation in the US, is weighed down by 48 billion euros of debt – cannot meet the task. In April, SFR renegotiated its debt, gaining a prolongation of repayments, initially promised for 2017 and 2019, to 2025. Meanwhile, it succeeded in reducing the VAT rate due for mobile subscriptions which were coupled with access to news publications owned by the group, reducing the tax rate from 20.6% to the 2.1% granted to the print and digital press. Similarly, the VAT rate for internet subscribers who also took out subscriptions for access to TV channels was reduced to 10%.
At the same time, SFR has discreetly raised the price of its subscriptions, raising the hackles of subscribers. Consumer rights’ organization UFC-Que Choisir reported in February that the numbers of unsatisfied SFR customers had reached “unprecedented” proportions, while on the forums of another consumer rights’ association, 60 Millions de consommateurs, the complaints about SFR are incessant. They include incidences of overcharging, the rising cost of subscriptions, and the difficulties in reaching customer hotlines. The exasperation, resembling that of customers of Numéricable before its merger with SFR, has reached the point where a number of SFR customers are planning a group action lawsuit against the operator.
Amid this climate, the cost-cutting plans announced by the group include moves to dispense with proximity towards its customers, through the closing down of a large number of its high-street stores, the closure of hotline centrees in France in favour of the creation of others based in Morocco and Madagascar, with a reduction in staff numbers in its client relations and billing services.
In its yearly report published in 2015, SFR observed: “The group recorded a significant amount of resiliations these past years because of the intense competition in the mobile sector […] Any increase in the number of resiliations could have a negative effect on turnover and an even more damaging effect on margins, because of the fixed costs inherent in the group’s activities. Improvements of customer care services may prove necessary in order to obtain the desired level of growth, and if the group does not succeed in making these improvements this could in the future […] damage its reputation, contribute to a rise in the rate of resiliations.”
In sum, the group’s management itself identifies the dangers that threaten it and the remedies that should be employed. But despite this, it is taking the opposite path, following a short-term financial approach, steering the group towards becoming the outright loser in France’s telecoms war.
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- The French version of this article can be found here.
English version by Graham Tearse