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France Telecom’s Spanish subsidiary – Orange Spain has acquired Simyo, a mobile virtual network operator (MVNO) from Dutch telecom giant KPN N.V. The deal will consolidate France Telecom’s position in the Spanish market where it faces stiff competition from market leader Telefonica S.A. (TEF - Analyst Report).  

As per the deal, the French telecom giant will run the MVNO under Simyo brand and has promised not to make any changes to the current tariff and service conditions. This signifies that France Telecom doesn’t have to bear high promotional expenses to establish a new brand. Simyo has 380,000 customers in Spain and has fetched $40 million dollars from the Paris-based company.

In July, 2012, KPN had put up Simyo for sale for which it had also received offers from UK-based Vodafone Group Plc. (VOD - Analyst Report).  Notably, offloading the MVNO asset marks the exit of KPN from the Spanish market.

France Telecom faces tough competition from Bouygues, SFR, Telecom Italia S.P.A. (TI - Snapshot Report) and Vodafone Group in its domestic operations, which account for more than half of its revenue and profit. This has resulted in France Telecom losing its market share and recording lower margins and profitability.

To trim down its mounting loss, the company is reducing its exposure in the weaker markets and is trying to strengthen its position in the core markets. In order to fulfill this attempt, the company could also bid for Yoigo – another Spanish MVNO owned by Swedish telecom carrier TeliaSonera.

We believe acquiring these MVNOs will only strengthen France Telecom’s position in the Spanish market, which currently has 12.2 million units in Spain. However, continuous acquisition might strain the company’s balance sheet, as there is no guarantee that these investments would be profitable.

We currently maintain a long-term Neutral recommendation on France Telecom. Currently, it holds a Zacks #3 Rank, implying a short-term Hold rating.

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