Europe's telcos need to learn debt prudence

PARIS Wed Jun 13, 2012 11:51am EDT

1 of 2. Gervais Pellissier, Chief Financial Officer of France Telecom attends a Reuters Global Media and Technology Summit in Paris June 13, 2012.

Credit: Reuters/Mal Langsdon

PARIS (Reuters) - Europe's telecom operators must be more careful about managing their debts even though that will curb their ability to spend on acquisitions and reward shareholders as the sector hots up, a senior France Telecom FTE.PA executive said.

The industry has entered a period of turbulence touched off by the arrival of Mexican telecom giant Carlos Slim to Europe, who is seeking to buying up low-priced telco assets, as well as looming investment needs in network upgrades.

Telecoms companies hold some of the highest levels of debt among blue-chips and key debt-to-earnings ratios are being stretched as profits drop because of tough competition and recession in some markets.

France Telecom has been working to keep its debt-to-EBITDA ratio at 2 but as profits have shrunk because of a new mobile challenger in its home market, it has come under pressure to keep a lid on debt and lengthen its maturity.

Many rivals have higher debt ratios, with Spain's Telefonica (TEF.MC) under particular stress, selling assets to protect its rating and possibly play a role in a new wave of consolidation.

Speaking at the Reuters Global Media and Technology Summit on Tuesday, France Telecom Chief Financial Officer Gervais Pellissier said he learned to be prudent on debt when the group nearly defaulted in 2002 after a debt-fueled acquisition binge during the Internet bubble.

At the outset of the credit crisis in 2008, France Telecom set the group's debt-to-EBITDA ratio at two, lower than peers.

"I remember our big shareholders at that time were not happy at all because they thought we were being too careful," he said. "Now when I discuss that ratio with Moody's or Fitch, they no longer view that as conservative."

Credit rating agencies Fitch and S&P have put France Telecom on negative watch because of tough competition at home, although it still holds a higher rating than most of its peers at A-.

France Telecom shares have lost 19.5 percent this year and it has predicted its EBITDA will fall by 1 billion euros ($1.25 billion) in 2012, largely because of weakness in its home market.

DEBT MATURITIES

France Telecom's debt ratio stood at 2.1 at the end of 2011, while Telefonica's ratio was 2.6 after being hit hard by record unemployment in Spain and the banking industry crisis. Vodafone's (VOD.L) ratio was 1.7 and KPN's (KPN.AS) 2.5.

Telefonica, which has 57 billion euros in debt, needs to raise between 7 billion and 8 billion euros a year through 2015 to cope with debt maturities. Standard & Poor's downgraded the company to "BBB" on May 24, citing intense pressure in Spain, while Moody's placed Telefonica on review for downgrade.

To protect its investment-grade rating, Telefonica has said it will accelerate asset sales, consider listing its German and Latin American units and pay out less of its dividend in cash.

For Stuart Reid, credit analyst at Fitch, Telefonica's moves and Pellissier's caution are a sign of the times.

"Even large, well-diversified telecom operators are increasingly concerned about protecting their credit ratings given pressures in the economy and financial markets, concerns that were less present in the past," said Reid.

For his part, Pellissier said his finance team was now managing the group's debt on a weekly basis.

"We do fear a downgrade, but even if it came it would just put us at the level of our peers," he said, adding that operating pressure on the business in France was to blame. "Even if you manage the debt well ... you need to generate cash."

The debt issue also risks weakening the ability of European telecom operators to participate in the consolidation of the sector that some analysts think is the only way to create more profitable companies.

With shares of the sector beaten down, Mexico's Slim has chosen this moment to seek a beachhead on the Old Continent.

The owner of America Movil (AMX.N) has scooped up a stake in Telekom Austria AG (TELA.VI) and mounted a raid on Dutch KPN, ramping up the pressure for consolidation in major markets like Germany.

"With our debt loads, European operators just don't have the firepower of our U.S. or Asian peers," Pellissier said.

He added that if the debt-to-EBITDA ratio of 2.3 were applied to the sector as an average, European telecom operators would only have 8 billion euros of borrowing capacity to pay for acquisitions, compared with 250 billion for Asian peers.

"Mr. Slim has money, China Mobile has money, Singtel has money ... My feeling is that (India's) Bharti would be keen one day to buy a European operator."

Asked if he was worried about Slim's arrival, Pellissier said he saw it as proof of healthy prospects in the European market, despite the unpopularity of the sector's shares.

"Mobile data is growing and we have high monthly revenue per user in Europe," he said. "Mr. Slim knows what he is doing, so if he is willing to put 3 billion on the table for part of KPN, then I see that as a good thing."

($1 = 0.8028 euros)

(Editing by David Holmes)