UPDATE 3-Telekom Austria fights price war with cost cuts

Wed Nov 14, 2012 7:53am EST

* Q3 EBITDA 410 mln eur vs Reuters poll avg 379 mln

* Sales 1.09 bln eur vs poll avg 1.12

* 2012 forecast and dividend expectations reiterated

* Shares up 9 pct (Adds analyst comment, detail, background)

By Georgina Prodhan

VIENNA, Nov 14 (Reuters) - Cost cutting helped Telekom Austria hold earnings steady in the third quarter, as it battles to defend a leading position in its home market in the face of a price war.

Shares in the group, which hit an all-time low this week, jumped as much as 12 percent on Wednesday, offering some respite to Mexican billionaire Carlos Slim, who invested in the firm earlier this year as part of a European expansion drive.

However, some investors feared the good news might not last, as Telekom Austria scraps with three other mobile operators in the tiny Austrian market of 8.4 million people, where all-inclusive monthly packages start at just 7.50 euros ($9.50).

"The numbers were a bit better than expected. It's a classic short squeeze today. But I don't believe it's a long-term trend reversal," said fund manager Guenther Schmitt of Raiffeisen, a top 10 shareholder in the company according to Reuters data.

Telekom Austria has bet on emerging European countries to offset declines in its mature and crowded home market. But there has been little sign of this so far. In the last three months, it has slashed its profit and dividend forecasts.

Investors have been hoping that competition might ease after Hutchison 3G Austria, the smallest of the country's four carriers, agreed to buy second-smallest Orange for 1.3 billion euros, in a deal that includes Telekom Austria acquiring Orange budget brand Yesss for 390 million euros.

But an unexpectedly prolonged investigation into the deal by European regulators has raised uncertainty about market consolidation and delayed an auction for new frequencies that will allow operators to offer faster services for higher prices.

"We're still very concerned about some of the medium-term trends," said Espirito Santo telecoms analyst Andrew Hogley.

"You don't need very much of a hiccup before you're going to think about forced asset sales or an equity injection from Mr Slim," he said, adding he did not expect any such measures in the next few months.

Telekom Austria shares have approximately halved in value this year, despite the acquisition of a 26 percent stake by Carlos Slim. Together with Dutch group KPN - Slim's other European bet - Telekom Austria is the worst performer in the European telecoms index.

At 1245 GMT, its shares were up 9 percent at 5 euros.

NO RESPITE

Telekom Austria said improvements in Belarus and some of its smaller markets as well as a strong Austrian landline business had partly offset mobile weakness in Austria and Bulgaria - where it has been hurt by regulatory cuts to connection charges.

Earnings before interest, tax, depreciation and amortisation (EBITDA) slipped 0.6 percent to 410 million euros ($521 million) in the third quarter, better than the 379 million average forecast in a Reuters poll of 10 analysts.

The company reiterated its 2012 financial forecasts, which it cut in August, and its intention to pay a dividend of 0.05 euros per share for 2012 and 2013, which it slashed in September from 0.38 euros per share.

Quarterly sales fell 1.6 percent to 1.09 billion euros, below the Reuters poll average of 1.12 billion.

"Increased competition in Telekom Austria Group's major markets, such as Austria, Bulgaria and Croatia, has led to further price erosion and is expected to persist for the foreseeable future," the company said in a statement.

Austria was one of the first European markets to implement regulatory cuts to the charges operators can charge one another for connecting calls, making it a ripe market for the price wars that are now raging. France, another early country to implement such cuts, has seen the entry of discount operator Free Mobile.

Telekom Austria said it had cut its operating costs by 18.1 million euros in the quarter.

Revenues in Austria fell by 5 percent and core profit by 3 percent. But the group increased its number of fixed broadband lines by 4 percent to 1.3 million and its average revenue per line by 1 percent to 32.2 euros per month.

In its Austrian mobile business, it increased the number of subscribers by 2 percent to 5.3 million, giving it 39 percent of the market - as many customers have more than one contract - but average revenue per user fell 9 percent to 18.3 euros.

($1 = 0.7867 euros) (Additional reporting by Angelika Gruber; Editing by David Cowell and Mark Potter)

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