WRAPUP 1-Telcos shrug off impact of connection rate cuts

Fri Nov 19, 2010 11:34am EST

* Deutsche Telekom, KPN say cuts won't impact earnings

* France Telecom says regulatory pressures will ease

By Nicola Leske

BARCELONA, Nov 19 (Reuters) - Planned cuts in fees that operators charge each other for connecting calls will be manageable, European telecom operators said, calming investor concern that profit margins could be hit.

Deutsche Telecom (DTEGn.DE), Europe's biggest telecom group by revenue, said upcoming cuts in so-called mobile termination rates -- which operators have been ordered to make -- would not have a dramatic effect.

Chief executive Rene Obermann told a conference on Friday it was difficult to predict by how much the German national regulator would slash fees but said: "Whatever happens, the impact on us will be affordable".

Termination charges account for about 12-15 percent of European mobile service revenue.

Smaller rival Dutch KPN (KPN.AS), whose E-Plus unit operates in Germany, struck a similar tone.

"We think we can surpass (mobile termination) rates and are in good shape," chief financial officer Carla Smits-Nusteling told the Morgan Stanley annual TMT conference, adding KPN had managed to compensate for cuts in Belgium and the Netherlands.

She said even a 40 percent cut would not force the company to change its outlook for this year or next.

In June 2008, the European Commission published guidelines recommending mobile termination rates be cut 70 percent with the move phased in by 2011, to lower prices for consumers and boost competition.

It has indicated that rates across the member states should be around 1.5-3.0 euro cents per minute by 2012 from about 6 cents, on average, currently.

VIVENDI STILL WARY

The German telcoms watchdog was expected to order rate cuts for next year by the end of the month, which will come into effect immediately.

Last year, the regulator in Europe's biggest economy cut rates 16 percent to 6.59 cents per minute for Deutsche Telekom and British group Vodafone (VOD.L). Rates for KPN's (KPN.AS) German unit E-Plus and Telefonica's (TEF.MC) O2 Germany were cut 17 percent to 7.14 cents.

Other European countries have also begun implementing cuts.

In France, mobile termination rates have come down once again, Vivendi (VIV.PA) chief executive Jean-Bernard Levy said, "and they are the lowest in any of the large European markets". That will pressue incoming revenues in the second half of 2010 and in the first half of 2011, he said.

But France Telecom FTE.PA said overall future regulatory impacts looked less severe than in the past. "We will have -- in the coming years starting in 2011 -- less presssure from regulation decisions," chief executive Stephane Richard said.

"We are entering a new cycle in terms of regulations, we will have a progressively lower impact of regulations on our bottom line and EBITDA (earnings before interest, tax, depreciation and amortisation)," he said.

Operators' revenues have been hit by cuts in the past but, because they have taken place gradually over time, companies have been able to rebalance consumer tariffs and adjust costs accordingly.

Credit rating agency Fitch has said mobile termination rates (MTRs) for leading operators in western Europe had roughly halved to about 6 cents per minute by end-2009.

Fitch estimates the regulatory cuts were likely to continue having a significant direct impact on underlying EBITDA, resulting in about 10 percent reduction over the period 2005-2013.

But Obermann was confident the loss in revenue could be compensated. "We can digest MTR cuts," he said. (Additional reporting by Georgina Prodhan; Editing by Dan Lalor) ($1 = 0.7158 euro)

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