Disaster Of The Day: European Telecoms
If the European telecom sector could be described as a ship--the Titanic immediately comes to mind--then it may well have met its fatal iceberg this week in the form of France Telecom's implosive IPO for its Orange wireless unit.
Orange floated yesterday and promptly began taking on water after already having its issue price slashed several times in the past several months. Its shares debuted yesterday at 9.5 euros, already at the bottom of its pricing range, and closed below that at 9.4 euros. The new shares disappointed for a second day today, closing down in Paris another 6.28%, to 8.81 euros, dragging France Telecom (nyse: FTE - news - people) down another 5% along the way. In response, shares in the European telecom sector as a whole dropped to levels not seen since mid-1999. Most major players dropped at least 5% today.
It was supposed to be smooth sailing all the way for France Telecom. When it bought Orange last year from Vodaphone AirTouch (nyse: VOD - news - people) for $36.6 billion and the assumption of $8.8 billion in debt, the company claimed that the unit had a $140 billion valuation when combined with existing mobile assets. At the time, that seemed reasonable. The thinking was that France Telecom would spin off the unit and easily wipe out its debt, which currently hovers in the neighborhood of $56 billion.
But that was before the first of the European auctions for third-generation mobile licenses, which promised to provide a network for delivering broadband multimedia content to mobile handsets. The major players went on a borrowing frenzy to finance the purchase of the licenses. After the dust settled, according to Morgan Stanley Dean Witter, the companies had collectively racked up an astounding $250 billion in debt, but still faced another $100 billion in costs in order to build out the networks and try to recoup their investments.
That massive debt burden presents a potentially lethal threat to these companies. It is highly possible that this technology may turn out to be just another case of dot-com-type euphoria that either vaporizes entirely or does materialize but fails to gain enough consumer interest.
This week's Orange bomb has unleashed rampant speculation that Deutsche Telekom (nyse: DT - news - people) CEO Ron Sommer is under pressure to step down. Telekom denies those rumors, but this week's events have caused an unraveling of Sommer's expansion strategy, leaving him in an extremely tenuous position.
Shares of Deutsche Telekom hit a two-year low today, closing at 28.57 euros in Frankfurt, a level that could scuttle its plans to acquire U.S. cellphone operator VoiceStream Wireless (nasdaq: VSTR - news - people). Sommer has staked his career on the VoiceStream deal, using it as the cornerstone of Telekom's international expansion plans.
Under the terms of their agreement, VoiceStream shareholders have the right to renegotiate if the value of Telekom stock averages less than 33 euros for seven days within the 15 trading days prior to closure. While no closure date has been set, it's nearly impossible to imagine Telekom's price rising much above 30 euros in the present environment. Many analysts say that the deal could be called off any day now. If so, Sommer will no doubt be out the door right after the announcement.
As if that weren't bad enough, Moody's Investors Service yesterday cut the outlook on Telekom's bond rating to "negative" from "stable," and there is nothing to suggest that a full-fledged downgrading is not right around the corner. Such downgrades make it more expensive and difficult to borrow, drive down the price of existing bonds and adversely affect equity valuations. France Telecom, British Telecom (nyse: BTY - news - people) and KPN of the Netherlands have all had their bond ratings savaged in recent weeks.
But the billion-dollar question right now is how these companies plan to pay off their debt. The Orange IPO demonstrates they will not be able to tap the equities markets or spin off their wireless units. All of them have plans for wireless spinoffs in the pipeline, but they now seem to be just as much of a pipedream as the next-generation auctions were in the first place.
With all that debt and questionable revenue streams, the carnage may have only just begun for European telecoms.
forbes.com |
