February 24, 2011 / 12:15 PM / 8 years ago

WRAPUP 3-Domestic pressures take toll on European telcos

* France Telecom 2010 in-line, sees 2011 as being similar

* Portugal Telecom margins slip on economy, competition

* Telecom Italia 2010 net profit, revenues beat view

* European telcos struggle with shrinking revenue, profits (Adds Telecom Italia results)

By Leila Abboud and Shrikesh Laxmidas

PARIS/LISBON, Feb 24 (Reuters) - Further margin pressure is in prospect for European telecommunications operators in 2011 after France Telecom FTE.PA and Portugal Telecom PTC.LS reported domestic competition eating into last year’s profits.

Telecom Italia (TLIT.MI) Europe’s No. 5 telecoms operator, reported that 2010 profit nearly doubled thanks to one-time items, but fierce competition hit revenues at its closely-watched mobile unit.

Reductions in roaming charges and interconnection fees demanded by regulators cut into revenues in the home markets of the French and Portuguese operators, results released on Thursday showed.

Both have sought growth abroad by buying stakes in emerging market operators — France Telecom in the Middle East and Portugal Telecom in Brazil — but this hasn’t yet been enough to offset their reliance on former domestic monopolies.

Robin Bienenstock, analyst at Sanford C. Bernstein, said that France Telecom and Portugal Telecom faced similar challenges after years of being sheltered by historically high prices in their home markets.

“Now they are being hit with the double whammy of intensifying competition and a macroeconomic downturn,” she said. “Both of them also have question marks over their international growth stories.” <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

France Telecom wary on Syrian mobile bid [ID:nLDE71N20A] ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

France Telecom’s 2010 revenue fell 1.4 percent to 45.5 billion euros, while adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) slipped almost 1 percent to 15.64 billion. [ID:nLDE71N07L]

The results, largely in line with expectations, also showed operating margins down 0.9 percentage point to 34.4 percent.

“There is still pressure on margins, as the market anticipates the entry of the fourth mobile operator next year. We notice a nervousness among the operators in France,” France Telecom’s Chief Financial Officer Gervais Pellissier said.

European telcos are suffering from a growing view of them as essentially utilities, or defensive investment plays, with low valuations, high dividend yields, few growth prospects and decreasing profitability in the coming years.

GENEROUS DIVIDENDS

Telecom Italia, which has been under pressure to turn around its domestic mobile operations, reported a 10.5 percent fall in 2010 revenues at the unit. The operations have struggled amid a fierce price war with rivals Vodafone (VOD.L) and Wind.

The company, which is controlled by a group of Italian investors and Spain’s Telefonica (TEF.MC), reported revenues grew 2.5 percent, just ahead of expectations. Earnings before interest, taxes, depreciation and amortization were up 2.7 percent to 11.41 billion euros, broadly in line with expectations.

For Portugal Telecom, revenue in 2010 was largely flat at 3.74 billion euro, in line with expectations. [ID:nLDE71M2AW]

PT’s 2010 operating margins slipped 1.8 percentage points from a year earlier to 39.9 percent. Competition with rivals picked up in mobile and Portugal’s deep economic problems kept a lid on pricing power as consumers felt the pinch.

To compensate for these tough conditions, Portugal Telecom is seeking to expand in growing markets. Last July it reached a deal to buy a minority stake in Brazil’s main fixed-line phone carrier Oi TNLP4.SA for 8.32 billion reais ($4.98 billion).

Chief Executive Officer Zeinal Bava said after the deal 55 percent of revenues would come from high-growth areas like Brazil and Africa.

“We believe that the Brazilian economy has a very solid outlook and it will continue to underpin PT’s performance in the future,” he said in a phone interview.

As with other large telecom operators, both France Telecom and Portugal Telecom proposed generous dividends for 2010 and promised to continue such payouts in the coming years.

Telecom Italia marginally raised its dividend payout to 0.058 euro per ordinary share, in line with its earlier forecast of a conservative increase.

France Telecom, which has an 8.5 percent dividend yield, will pay 1.40 euros per share for 2010, 2011 and 2012. Portugal Telecom also set payouts for 2010 and 2011 at 0.65 euro and vowed to increase payouts a further 3 to 5 percent from 2012 to 2104.

It also paid a special dividend in the third quarter of last year after selling its stake in Brazilian mobile operator Vivo.

Vivo Participacoes VIVO4.SA, the country’s largest wireless carrier, said on Thursday its fourth-quarter profit more than quadrupled as it signed more subscribers.

Vivo, controlled by Spain’s Telefonica, said in a securities filing on Thursday that net profit for the quarter rose to 864.2 million reais from 203 million reais in the last three months of 2009. [ID:nN24229828] (Additional reporting by Nicola Leske, Deepa Babington and Elisabete Tavares; Editing by Alexander Smith and Gerald E. McCormick)

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