Telecom chiefs get real about their business: Assailed by investors, they promise to cut capital spending and bring down debt levels
19 Mar 2001
By Catherine Ong
IT'S not the best of times to be a chief executive of a telecommunications company.
Once at the helm of a booming industry enjoying heady growth prospects, the bosses of the world's biggest communications companies now find themselves in the doghouse. Investors have become downright unforgiving, as opposed to being hyped up just a year ago.
At the annual Merrill Lynch global communications investor conference in New York last week, chief executives of companies with declining fortunes -- like Motorola, Cisco, Nextel Communications and British Telecom -- were variously greeted with scepticism, rebuked for their optimism, or challenged on their assumptions.
Others who claimed their business outlook remains bright -- notably the heads of Nokia, Verizon Communications, Bell South, Qwest Communications International and Global Crossing -- weren't signing up ready converts either.
Perhaps none had it as rough as Chris Galvin, chairman and chief executive of Motorola Inc. At his lunch presentation, a woman fund manager took him to task. He should be embarrassed, she admonished, that the biggest US mobile handset manufacturer lost market share two years running to its Finnish rival Nokia -- going from 20 per cent in 1998 to 15 per cent last year.
"How can you get your market share back?'' she demanded to know, as the room of more than 1,000 money managers and analysts waited with bated breath for the reply.
The soft-spoken Mr Galvin who minutes earlier had declared that ''the future of the business we're in is nothing short of spectacular" toned down his rhetoric and turned appropriately contrite. "I'm embarrassed about it, the people in the company are embarrassed about it . . . but we do not intend to give up the space," he said.
A second fund manager rapped Mr Galvin for allowing Motorola to become too diffused over too many activities, with the result that it had lost leadership in almost every business it is in. "What can you tell us to make us more comfortable?" he asked stiffly.
The Motorola chairman thanked him for his criticism but maintained that the company isn't unfocused. It has accomplished three or four things it set out to do in the last few years, and streamlined its myriad of businesses to four core areas. Motorola, Mr Galvin pointed out, is a leader in GPRS, the 2.5 generation mobile communication system.
"I don't deny we made mistakes in the handset business," he said.
Motorola wasn't the only company having to face up to mistakes committed in the last two years when a surge in global demand for telecom services and equipment, coupled with a roaring bull market in equities, encouraged big and small players in the industry to make a ruthless dash for assets and market shares. The excesses built up are now being unwound.
Assets that were bought barely two years ago at inflated prices are being put on the market at a discount to pay down the mountain of debts incurred for the purchases. Workers are being laid off by the tens of thousands to maintain margins and dividend payments, as revenue and earnings slump.
While not quite saying they went over the top in capital expenditure (capex) which last year rose 40 per cent against industry revenue growth of 12 per cent, almost every CEO at the Merrill Lynch conference promised to rein in their capex in the coming years to a rate at or below growth in revenue. Merrill Lynch analysts estimated that if US telecoms companies had paced their capex at the same rate as their sales, the investments last year would have been lower by US$20 billion (S$35.2 billion).
John Bender, a portfolio manager at Strong Capital Management, said a major point he got out of the conference was that the capital spending cycle of the telecoms and equipment companies was continuing to slow down. "That's going to have an impact on the economy going forward, so we are less likely to have the V-shaped recovery in the second half that everybody is talking about," Mr Bender added.
The downsizing of capital spending is good news for those with infrastructure to lease or excess capacity to sell. One such company, Global Crossing, which owns an undersea and terrestrial fibre optic network, believes it stands to benefit now that the "buy" option looks more attractive than the "build" option for carriers facing financial constraints.
Asked to respond to Hongkong's Pacific Century CyberWorks' plan to pull back on network expansion, Stefan Riesenfeld, chief financial officer of Asia Global Crossing, couldn't help this jibe: "If I have US$12 billion of debt, I might pull back as well."
Debt, as it turned out, is one big burden for many European telecoms companies, particularly those that overbid for 3rd Generation (3G) licences. British Telecom chief executive Peter Bonfield who recently conceded that the company paid £10 billion (S$25.5 billion) too much for 3G auctions in the UK and Germany, said at the Merrill Lynch conference: "Obviously when you won it, you thought it was a great idea. When you've to pay for it, you think it's less of a great idea."
The priority for British Telecom this year is de-leveraging. It is embarking on a major exercise to raise cash to reduce debt totalling US$45 billion. Its plans include listing some of its subsidiaries and making a rights call.
As well, it has put its real estate holdings on the market. Many of the investments it snapped up in Asia during a US$1 billion spending spree in 1998 and 1999, including its 18 per cent stake in Singapore's StarHub Pte Ltd, are likely to go too. Mr Bonfield promised the fund managers its asset sales "will not lead to a destruction of shareholder value".
He told The Business Times he expects to realise a profit from the sale of its interest in StarHub, and that its existing partners in the joint venture have first right of refusal to its stake.
For British Telecoms and other European telcos attempting to regain lost fiscal prudence, the timing couldn't have been worse. To hang on to their "single A" rating, these companies have little choice but to pay down their debts.
But the alternative of equity is not much of an alternative these days. With the stock markets in the US and Europe in free falls, shareholders will be demanding a steep discount before they are prepared to stump up the cash. Already, most telco shares are trading at huge discounts to their net asset values.
British Telecom has seen its stock price plummet from a high of £15 a year ago to £5 currently. One way out of the quagmire is to refinance existing debts at higher costs. Mr Bender, the portfolio manager, estimates that US$40 billion to US$50 billion in telecoms debt could hit the market this year, creating a supply overhang.
To be sure, not all was gloom and doom at the conference. The CEOs of companies like Verizon, Bell South, Qwest and Voicstream continue to project double-digit growths in some areas of their businesses, particularly those for data and wireless services.
As Ron Sommer, the CEO of Deutsche Telekom, pointed out, the US market for mobile communications is lagging behind Europe and Japan. If the US attains an 85 per cent penetration rate, mobile operators like Deutsche Telekom's VoiceStream Wireless still has a potential market of 150 million new customers.
Broadband services such as Digital Subscriber Line (DSL) is also enjoying a boom even as others like long-distance voice business continue to decline.
Companies like Bell South and Verizon find themselves hard pressed to keep up with installations of DSL lines. Duane Ackerman, Bell South's chairman and CEO, said the company was laying 300 DSL lines per business day in the first quarter of last year. By the fourth quarter, installation surged to more than four times, at 1,300 lines a day. This year, it plans to sign up 600,000 DSL customers, more than double the 250,000 recorded last year. "Broadband is the king. Two-thirds of the traffic on our network is data," he said.
Still, few investors see themselves rushing out to load up on telecoms shares this year. "The conference didn't change my view,'' said Maurice Onyuka, portfolio manager at Clemente Capital. "If anything, it confirms my view that there's definitely a slowdown in the sector. I wouldn't be touching any telecom shares."
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