SURVEY - FT TELECOMMS: Giant telcos will need far-sighted management: VIEWPOINT: INDUSTRY FINANCES by James Durance and Edward Lucas: In Europe and the US, big telecom operators face stiff competition, massive 3G investment costs, and declining call revenues. But once they have devised a way to get out of debt, most of them can turn the corner
Financial Times; Jan 17, 2001
By JAMES DURANCE and EDWARD LUCAS
The current global telecoms climate is seeing stocks slide ever lower. The blue-chip telcos of the US and western Europe are among the hardest hit, with Asian telcos looking far better positioned.
The low share prices are in part attributable to a natural downturn following the boom early last year in TMT (technology, media and telecommunications) stocks. Also responsible is the co-incidence of third-generation (3G) mobile costs, rapidly increasing competition, and falling prices in core voice telephony. In some cases poor management is also to blame.
The accumulation of debt is symptomatic of these crises, and it is a reasonable prediction that heavy debts will cause some big-name telcos to disappear. Dealing with debt has become the number one concern for many blue chip companies, which are exploring a variety of strategies to put themselves back in the black.
Selling non-core assets is an obvious way of producing instant revenue. One way of doing this is by streamlining, as carried out by Vodafone and Cable and Wireless (C&W). Both are concentrating on one main sector; Vodafone on mobile, C&W on corporate fixed-line. Both have bought up like-minded businesses while ruthlessly shedding assets that do not comply with their future strategies.
The benefits of streamlining speak for themselves. Vodafone is now the UK's largest company by market capitalisation, and has more than 78m subscribers worldwide. C&W is sitting on some Pounds 4.2bn (Dollars 6bn) of cash revenues, and is one of the world's top data carriers.
The self-confidence of Vodafone and C&W has been noticeably lacking in compa nies such as BT and AT&T recently. These two companies have been stripping themselves more indiscriminately of assets in a bid to collect short-term revenues.
Certainly, quick-fire selling of assets can be an effective tool for raising cash and decreasing debt. But one serious drawback is the impression of desperation it can give to markets.
In the last quarter of 2000 BT - which is facing debts of about Pounds 30bn - announced the cull of many of its global assets outside western Europe and Japan. It then seemed to contradict its own strategy by announcing the sale of a stake in Switzerland, and publicly falling out with partners in Spain, France and Italy.
It is simplistic to say that streamlining is the answer to all giant telcos' problems. Nevertheless strategic sales that are part of a long-term business plan rather than a short-term cash-grab are clearly key to the success of the sell-off debt reduction model.
Another way to deal with debt is to restructure your business from within and then spin off parts of it. BT and AT&T have both recently announced restructuring plans that will see significant internal changes to their businesses. BT is creating a new holding company and network company, NetCo.
Following that, it will float BT Wireless (its mobile division) and Yell (directories division) in an attempt to shave Pounds 10bn off its total debts.
AT&T plans to break into four separate parts, spinning off its wireless unit and separating its cable, consumer and business divisions.
Historically, AT&T has been very adept at streamlining and selling off non-core businesses, but the market has yet to green-light its latest strategy because of the scale of its debts. AT&T's recent tracking stocks have been poorly received, largely because of the decline of its fixed-line business.
Restructuring in itself does not reduce a company's debt. If market faith in management is low, restructuring has little more effect than shuffling cards in a deck. But if restructuring is supported by the successful initial public offerings (IPOs) of group units - as seen with Spain's Telefonica over the last 12 months - debt levels come down.
If telcos gain the confidence of investors, they can cope with debt by borrowing more. Global telcos, most of them European, issued Dollars 94bn in bonds during the first three quarters of 2000, according to the Bank for International Settlements. In total, telcos borrowed a staggering Dollars 197bn in international syndicated loans during that time.
Refinancing debts by turning short-term loans into long-term ones is an option. But borrowing for telcos in the west is getting harder as both the confidence and the funds of investors are running out. Regulators and banks are increasingly viewing indebtedness as a threat to European financial markets. Banks have even been warned by some regulators and ratings agencies against overexposure to telco debt.
To reduce that overexposure, many telcos have decided to share their debts with like-minded partners. Mergers, alliances and consolidation will be crucial to the future survival of large telcos, particularly in the field of 3G developments. In the longer term, partnerships reduce telcos' debt exposure through economies of scale in network development.
Despite the gloom, it should be emphasised that 3G could eventually be the "get out of jail debt free" card for licence holders in the bigger markets.
Yet even if 3G is the success story that everyone hopes for, average estimates suggest it will not achieve profitability until about 2007. As a result some telcos must worry that another six years of debt will leave them vulnerable to takeovers. However, consolidation among 3G operators is inevitable, especially to cover the cost of infrastructure.
Over-exposure to debt in Asia has not yet reached the levels seen in the west. In early 2000, internet start-up Pacific Century Cyberworks (PCCW) acquired Hong Kong's fixed-line operator Cable & Wireless HKT. In the months that followed its bold move, it has faced a significant debt burden and fluctuating market opinion.
But it has successfully followed two classic debt reduction strategies to alleviate its situation - forming a partnership (with Australia's Telstra), and debt refinancing through syndicated loans and recapitalisation plans.
One reason why PCCW HKT attracted investment easily is because of its balance between old and new telco businesses, a combination that appears less likely to turn off otherwise hostile lenders. This contrasts with current investor attitudes to AT&T, BT and France Telecom, which in the eyes of many are still culturally former PTTs with new business only on the periphery.
The PCCW refinancing shows that Asian pockets do not fear over-exposure to the sector yet. Ironically, it seems the more protectionist environment of many Asian markets is insulating Asian companies from the credit squeeze suffered by western companies. The Asian telcos' acquisition strategies have also been relatively cautious, in comparison with their western counterparts.
Although it is easy to criticise the giant telcos of Europe and the US for their current plight, it is telling that so many of them are in the same boat. All are facing crises of increased competition, massive 3G investment costs, and declining call revenues.
Once they have devised a way to get out of debt, most of them can turn the corner. However, management will have to be far-sighted, and debt strategies coherent.
Eventually, to keep their debts down, it is highly likely that the big telcos will be forced to streamline. In the longer term, successful companies will focus on specific sectors. Streamlined, but internationally focused giants are becoming the new rulers of the communications world.
James Durance and Edward Lucas are research analysts for World Markets Telecoms, a division of World Markets Research Centre. This article and the content in the accompanying graphic are extracted from their In Focus 2001 report series, available at www.worldmarketstelecoms.com. An expanded version of the regional data above is available at www.ft.com/telecoms
Copyright: The Financial Times Limited
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