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Orange's network investments help ward off low-cost rivals in France

By Leila Abboud and Gwénaëlle Barzic

PARIS (Reuters) - Telecoms operator Orange's investment in faster fiber and mobile broadband networks in its French home market has started to pay off, as its high-end focus insulates it from cut- price fixed plans offered by rival Bouygues.

As France's largest carrier reported second-quarter results in line with forecasts on Tuesday, it said that some 60 percent of new mobile customers were signing up for high-end plans that include 4G and that 50,000 new customers had signed up to its fiber broadband offers, taking the total to 415,000.

Orange shares are up about 30 percent so far this year, the biggest gainers among Europe's large-cap telecom firms, as investors bet on its recovery from a French price war touched off by low-cost player Iliad's entry to the mobile market in 2012 as well as possible consolidation.

Bouygues took the price battle to the fixed broadband market this March with a TV, Internet and fixed-line phone bundle at 19.99 euros ($26.9) a month, a move that analysts said risked hurting Orange since it has the largest fixed client base.

"Our strategy is to migrate people to fiber broadband since afterwards they will not want to downgrade to a slower service even it costs a few euros less per month," Orange Chief Financial Officer Gervais said on Tuesday. Asked about the effect of Bouygues' cheaper broadband offers, Pellissier said Orange had not lost any customers and that the market was polarizing into high- and low-end services, much like what has already happened in mobile.

"We have the best mobile network in France and that attracts the premium customers," Pellissier said.

Investment in networks rose to 1.34 billion euros in the second quarter, or 13.7 percent of revenue compared with 12.7 percent a year earlier.

To cope with tough competition and falling prices across its major markets of France, Spain and Poland, Orange has been cutting costs on everything from marketing to office space. It pledged to keep up the effort and upped its annual cost-cutting target to 300 million euros from an earlier goal of 250 million euros.

"Overall Orange figures for Q2 look solid and performance from the cost-cutting side enabled the company to offset what are still quite tough conditions in some of the markets where it operates," Espirito Santo analysts wrote in a note to clients.

Shares in Orange, a former monopoly which is 27 percent owned by the state, rose 1.6 percent when the market opened before falling back to be flat in mid-morning trade.

CONSOLIDATION STILL POSSIBLE

Orange called off talks toward a possible bid for third-place mobile operator Bouygues in early July, saying the conditions were not met for a deal.

But Chief Executive Stephane Richard told BFM Radio that mobile consolidation in France was still possible down the road.

"It's not because the talks did not work out this time that they cannot work out in six months or a year's time," he said.

After the Bouygues deal fell through, Richard told Reuters Orange sees possible acquisition targets in Spain.

Orange said it had "very limited" interest in Yoigo, the smallest mobile operator in Spain that owner Teliasonera recently said it would consider selling.

"Things have changed in the market since two years ago when Yoigo was last up for sale," said Pellissier, referring to a 2012 sale process that saw Orange and Vodafone submit offers that Teliasonera rejected.

"Yoigo's market share has not grown since then; its customer churn is high," said Pellissier.

Orange reiterated its annual profit and debt targets on Tuesday after it stabilized its margins in the second quarter, helped by cost cuts and smaller sales declines in France and Poland than a year ago.

It posted second-quarter sales of 9.79 billion euros and restated earnings before interest, tax, depreciation and amortization (EBITDA) of 3.12 billion.

($1 = 0.7443 Euros)

(Editing by James Regan and Andrew Callus)

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