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Europe's telcos on the back foot through 2013
January 30, 2013 / 12:10 PM / 5 years ago

Europe's telcos on the back foot through 2013

* Revenues and earnings set to decline for second year

* Nordic operators are growth exception

* Strain forcing groups to rethink strategy, debt, dividends

* Telefonica weighs LatAm IPO, Tel Italia examines spin-off

By Leila Abboud and Kate Holton

PARIS/LONDON, Jan 30 (Reuters) - European telecoms valuations are languishing near decade lows, and investors are unlikely to be tempted back over the next few weeks, when industry results will show that revenues remain on the slide.

Telco stocks were the region’s second-worst performing sector last year, falling more than 10 percent, and few expect the problems of intense price competition, tight regulation, heavy investment needs and high leverage to abate this year.

Citigroup sees telecom revenue falling 3.1 percent in 2013 after a 0.7 percent decline in 2012, with operating profits down 3.7 percent after a 3.8 percent fall in 2012.

Espirito Santo predicts telcos, excluding newer challengers and cable companies, will see sales shrink by 1.1 percent on a compound annual basis from 2011-2015, and earnings before interest, tax, depreciation and amortisation (EBITDA) will fall 1.4 percent.

“We continue to see structural risks looming prominently in the sector,” wrote Jeffries analyst Jerry Dellis in a note.

Against that backdrop, analysts are sorting European telcos into haves and have-nots based on debt burdens, balance sheet strength and exposure to weak economies like Spain and Italy.

The have-nots - KPN, Telefonica, Telecom Italia, Telekom Austria - are expected to see further sales declines in their home markets, increasing the risk that they might make further cuts in their dividends or have to issue more shares to alleviate debt.

The haves - Nordic groups Telenor and Teliasonera , Deutsche Telekom, Vodafone and France Telecom - are in better shape in terms of debt loads, but operationally they’re a mixed bag.

The Scandinavian operators are the only ones actually growing revenues and profits, helped by quick adoption of smartphones and mobile data, and relatively high prices.

But France Telecom, Deutsche Telekom, and Vodafone are slugging it out with price-cutting mobile and cable competitors, causing profit and cash flow to deteriorate.

Spain remains one of the toughest markets, where Vodafone, the world’s second largest mobile group by sales, and Telefonica have been damaged by recession-hit customers ditching their cellphones. Mobile tariffs have fallen 27 percent in past three years in Spain, where the unemployment rate is 25 percent.

The appeal of cheaper options such as TeliaSonera’s Yoigo cost Vodafone 287,000 customers in the last set of figures to be published - for November - while Telefonica’s Movistar lost around 252,000.

Other southern European markets such as Italy and Greece are also proving heavy going, while France remains locked in a price war caused by new mobile player Iliad, which has sent the average subscriber’s monthly bill down 13.7 percent.


The pressure is forcing many European operators to rethink their strategy, group structure, leverage, investment plans and disposals.

Industry payouts via dividends and share buybacks have been scaled back, with more of the same expected: Citigroup says they will fall from 43 billion euros ($58 billion) in 2011 to 26 billion euros in 2013.

Telefonica has been most active in this regard, scrapping its 2012 dividend and listing a stake in its German O2-branded mobile unit. Now the Spanish group, which reports results on Feb. 28, is considering floating up to 15 percent of its Latin American business to get its hands on more cash.

Dutch operator KPN, 28 percent owned by Mexican tycoon Carlos Slim, is also weighing tough decisions to cut debt, which remains above its target of 2.0-2.5 times EBITDA.

The group, which had to pay 1.35 billion euros for new mobile licences in December and will soon face new arrival Tele2 in an already competitive market, sets out its plans on Feb. 5.

The Dutch auction also spooked Vodafone investors, who are asking whether the trend for higher spectrum costs and a possible need for consolidation might force the British company to trim its dividend once its three-year payout plan ends.

Vodafone is also likely to face questions when it reports on Feb. 7 about its 45 percent holding in U.S joint venture Verizon Wireless, which contributed over half of Vodafone’s adjusted operating profit in the first half. Some analysts believe Vodafone could sell some of the stake to invest in Europe, where its core mobile business faces stiff competition.

Another European heavyweight that has had to balance the different demands of the U.S. and European markets is Deutsche Telekom, which is in the process of buying smaller U.S. mobile operator MetroPCS to boost its T-Mobile unit there.

When it reports earnings on Feb. 28, Deutsche Telekom is expected to provide an update on the acquisition and shed light on how competition is heating up in Germany.

It has already announced an ambitious investment plan for 2013-2015 in which it will ramp up capital spending on its German networks, especially in broadband, in a bid to blunt competition from cable companies that are winning share with faster Internet speeds and lower prices.

Telecom Italia, which updates the market on Feb. 8, has what is arguably the most dramatic decision to make on its strategic course; the operator is considering spinning off its fixed line network in Italy and is in talks with state-backed investment fund CDP over an investment in the new company.

Such a split would be a first for one of the traditional telecoms operator in Europe, but the plan, which the government sees as a way to improve the country’s woeful broadband infrastructure, faces many regulatory and technical hurdles.

More immediately, Telecom Italia is expected to give an update on efforts to reduce its debt, as analysts warn it could take the knife to its dividend again after a 25 percent cut in 2011.

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