Consulting » Turning the future Orange – The Financial Director interview

Graham Howe is full of zest when Financial Director
arrives at Orange’s offices in the Economist building . Not only has the
company just reported its first ever operating profit, but it has also topped
the first league table of mobile phone operators published by regulator Oftel.
Not bad going for the fourth – and last – entrant into the UK cellular market.

In fact, when Orange floated in March 1996, it had been in existence for
barely three years. With a market cap of £2.5bn, it joined the FTSE-100 later
that year and made Howe – then just 33 – one of the youngest FDs in a very
exclusive club. “I actually started as FD of this company when I was 30,” says
Howe, who seems unfazed by the question of his age. “The job wasn’t high profile
then, but it wasn’t hugely different. It was more operational; it’s become more
high profile because of the public side of it.”

Floating Orange probably counts as Howe’s most outstanding achievement to
date, and despite some rather acidic headlines – “Orange is a lemon,” is fairly
typical of some segments of the financial press at the time of the float – the
company continues to meet or exceed the forecasts made when it went public.
Those forecasts were critical to the company’s success, since with little
trading history, and in an investment-hungry and still largely untapped market,
straightforward valuation models simply would not work.

“One thing that we’ve been very careful of is managing expectations,”
explains Howe. “We’ve built a lot of credibility in delivering what we said we
were going to deliver. Our valuation, particularly in the early days, was
primarily based on a DCF (discounted cash flow) model. And as you can
demonstrate that you’re ticking off the early years, the belief that you’re
going to get through the back end of it obviously becomes stronger.”

Belief, as those headlines suggested, was a rare commodity for Orange in the
early days. The flotation had come about as the almost theoretical end point of
a large debt financing deal. By April 1995, Orange had garnered around 200,000
customers, but the lead shareholders – Hutchison Telecom and British Aerospace –
had sunk the best part of £1bn into the business.

“When I first started talking to banks, they indicated to me that they
thought that we could raise, at best, £200m to £300m non-recourse debt
financing,” says Howe. But the plan was more ambitious than that, because even
£300m would have fallen short of Orange’s investment requirements. “Our strategy
was to do the debt re-financing, and if that was successful, roll it into a
flotation. Canning Fok (Hutchison’s chief executive) used to describe it as an
‘Alice in Wonderland’ scenario. Although we were striving for it, we didn’t know
whether we were going to achieve it, but we ended up with an extremely
successful bank deal at the end of 1995 (£1.2bn) and rolled that into the
flotation in March 1996, by which time we were just getting up to 500,000

In less than 12 months, Orange had gone from being completely financed by
shareholders to completely stand-alone as a public company on the fringes of the

Unfortunately for Howe, the timing of the deal came at a most inopportune
moment. “When I was putting the timetable together for the debt facility in the
summer of 1995, my wife had just become pregnant, and I knew that on the
timetable I’d just put together, if she was late, I would run the risk of the
roadshow not getting off on time,” Howe confesses.

“It was the tightest possible timetable to do £1.2bn of debt, combined with a
lease facility at the time, plus the flotation – I actually thought it was
unachievable. So I was fairly relaxed (about the baby). “It was only as we went
successfully through the different bits and started to get towards the time,
that I was thinking, ‘Ah. The first child was late, the second one will probably
be late’ – and he was. I ended up with my second son, Jack, being born on the
Friday before I was due to fly to Hong Kong on the Saturday to start the Asia

The roadshow was a gruelling affair, involving a tour around Asia
(Hutchison’s base), Europe and the US – 25 cities in all, and a total of 100
one-on-one presentations and 30 group presentations. Leaving the baby was one
thing, but the worst aspect was that after the Hong Kong leg of the tour, the
underwriting was fully subscribed.

“So Hans (Snook, Orange’s chief executive) and I thought, ‘why do we need to
do the rest?’ The joint book-runners, Kleinwort Benson (as they were called at
the time) and Goldman Sachs didn’t share our belief that we could stop at that
point,” Howe says. “But that for me, on a personal and a business front, was an
emotional and stressful time.”

Snook and Howe were also self-confessedly green in those early days. Howe
admits that he thought “one-on-one presentation” was the Orange pair and one
banker or analyst; in fact, it was one firm in each meeting, with maybe 15
people attending. “It is very hard for management teams going through that
process to come out of the last meeting in four weeks doing it at the same level
of enthusiasm as the first,” Howe admits. “But the last client is just as
important as the first.”

Howe’s close relationship with Snook (he is, incidentally, the deputy chief
executive as well as FD) certainly helped – “you wouldn’t work in each other’s
pockets for 6 years if you didn’t get on,” he says – and there were humourous
moments to keep the momentum going. “We did one presentation when we were tired
where we played on our strapline,” Howe says. “We sat down and asked the guys
whether they just wanted to do Q&As or a full presentation. They said
‘presentation’, so I said ‘The future’s bright’ and Hans said, ‘The future’s
Orange – that’s it.’ And all these dead-pan faces – this was across the At
lantic, and they didn’t appreciate the humour at all.”

In the end, the offer was ten times oversubscribed, and the share price leapt
20% on the first day’s trading. This was all in sharp contrast to Howe’s first
dealings with what was to become Orange back in 1992. “Hans and I inherited an
exercise where British Aerospace were looking to sell off their interest in the
group of businesses here,” Howe says. “But at that time they were unable to find
anyone to buy them.”

At the time, sentiment about Hutchison’s UK ventures was poor. Rabbit, which
required callers to be within 100 yards of a base station and only allowed
outgoing calls, was on the ropes, and the new management team decided to close
it. Also, the PCN (cellular telephone frequency) licence held by Hutchison was
in the early stages of development. But it did show potential and the existing
players had effectively broken the ground for mobile usage.

Howe is still grateful that the original shareholders were so bullish about
the new venture – ‘Orange’. “The exercise to dispose of the BAe stake we called
a halt to – it was actually just destabilising the employees within the
business, and Hutchison as the major shareholder said they were going to carry
this business and drive it forward.” Howe remains friends with Richard
Lapthorne, who took the FD’s seat at British Aerospace at the same time he
joined Orange and was something of a mentor.

The other benefit Howe, as an FD, took from this bullish support was an
aggressive investment strategy. The incumbent operators (Vodafone and Cellnet)
had been operating for years with a dispersed network of base stations, which
meant that to receive a good quality service, users really required car-based
boosters for their phones. One2One, on the other hand, had opted for a swift
roll out, but only in London. But Howe and his colleagues realised that the
future of the industry lay in hand-portable phones that operated over the wide
st possible area, took calls inside buildings and dropped calls infrequently, if

With the initial capital outlay of the shareholders, the debt financing and a
more recent corporate bond issue, Orange was able to invest in a dense, high
capacity network. Howe is very enthusiastic about Orange’s technology, but the
bottom line is that a better service means better customer retention.

Customer churn is one of the key metrics in the mobile phone business, and
while its rivals’ average is still about 30%, Orange has an enviably low
customer turnover of just over 18%. “One thing that was always sacrosanct for us
was that we would never compromise on network investment,” Howe explains. “We
were fourth into the market and if we were going to be winners ultimately, we
wanted to be seen and understood to have the best network of anyone.”

But there was another way of looking at the benefits of high-quality service.
“The other issue was that when you’re fourth into a new market you don’t want to
be fourth, you want to be first into a new category, and the market was very
well positioned for us to be very different, because the market didn’t have a
customer champion,” says Howe.

This role was developed by using a direct sales model, as opposed to the
incumbent operators’ use of third parties to retail their airtime. “Because the
networks didn’t offer sufficient return to the service providers, the service
providers made little investment in customer service,” Howe says. “They tended
to nickle-and-dime the customer on things like itemised billing – why you should
ever have to pay extra to see what you’re being charged for in the first place
was madness. Clearly it wasn’t a customer facing industry.” Going direct also
gave customers a single point of reference if they had problems.

The investment in the dense network also meant that redundant capacity could
be used for applications as yet unheard of. Orange actually has a director of
futurology, Kenny Hirschhorn, who acts as a “facilitator of creative thought”
on the board. “Within the brand, we’ve built a stamp of quality, whether that’s
the network, the customer service, the care proposition – whatever,” says Howe.
“Also, ‘The future’s bright, the future’s Orange’ tagline says we’re taking
people into the future, so people need to continue to see us innovate, continue
to have firsts in the market of new products and services.”

Financially, Orange is doing well in the UK, but in fact mobile phone
penetration in Britain is amongst the lowest in Europe. While UK penetration is
about 22%, in Finland half the population has a cell phone. Analysts have
identified higher growth levels in continental Europe, and Orange’s FD is all
too aware that both financially and strategically, overseas markets cannot be

“As a customer, as you go to different markets you should expect the same
quality of service and the same quality of network – and some commonality of
services,” Howe insists. Orange has invested in cellular licences in Austria,
Switzerland and Belgium and has interests in service providers in France and
Germany. But the financial rewards – and control of the customer – are easier
with a new model starting to spread in Europe, the virtual network operator

“Basically you are buying the raw minutes from a network operator,” Howe
explains. “You can then package those in any way you like. You can develop your
own intelligent network systems, your own billing systems and all the direct
relationships with the customer so you can completely differentiate yourself in
that market, under your brand.”

Like many FDs today, Howe is barely recognisable as a finance man. He talks
technology, marketing and strategy, which, for him, underpin the finances. ”
Numbers at the end of the day are just a way of articulating a business strategy
or results, and if you don’t understand what makes the business tick you can’t
explain them to people,” he says.

Despite being a qualified accountant, Howe also realises that the only value
he can add as FD is as a strategic team leader. “We’ve been fortunate in the way
we’ve built the management team that we complement each other’s skills sets very
well. Being involved from the beginning, I’ve naturally had a very important
opportunity to make an input into strategy,” he explains. “That is the role that
is expected from you. Finance is all about adding value. You’ve clearly got
controlling elements, but really it’s about value added.”

Orange has had a meteoric rise to its current position and it has been
hectic. “We’ve embarked on things like the debt financing, the refinancing, the
lease deal, the flotation, the bond deal – most FDs through their careers don’t
go through all these things,” says Howe. “And we have a team of people who’ve
gone from being rookies to experts. As long as you realise what you don’t know,
and you fill around you to compensate for it, you build effective teams. When
you start young, you’re probably more open-minded in recognising that than if
you’re older.”