CWP looks good amongst the competition IMO:
A look at its down-and-out rivals suggests BCE has further to fall (gam)
Eric Reguly
First the good news. BCE shares haven't declined nearly as much as those of some international rivals'. Now the bad. This could change.
Forget the dot-coms. If you want to see destruction of value on a global scale, look no further than the big phone companies. Deutsche Telekom,Europe's biggest player, has gone from a peak of 98 euros in 2000 to about 17 euros -- a decline of 83 per cent. France Télécom has fallen by a similar amount. Both carry crushing debt loads and face financial overhauls that promise to be exceedingly painful for equity and debt holders (and the government agencies that partly own them). BT Group, formerly British Telecom, trades at one-quarter of its high and has been blowing management out the door like so many promotional flyers.
In the United States, the telecoms landscape is not nearly as ugly, but it's not pretty either. The Big Four so-called ILECs -- incumbent local exchange carriers -- are all well off their peaks. Verizon, BellSouth and SBC Communications,the company that owns 20 per cent of BCE's Bell Canada unit, are down roughly 30 per cent. The true dog is Qwest Communications, which has gone from $55 (U.S.) to $8. All four ran nearly $10-billion in negative free cash flow from mid-2000 to mid-2001 and are attempting to reverse the situation by gutting capital expenditures. Global Crossing and 360networks are in bankruptcy protection. Their competitor, BCE's Teleglobe, is ailing and could follow the same route.
How did they get into this mess?
While each company used different strategies to meet the peculiarities of their domestic markets, a few common themes emerge. By the mid-1990s, it was apparent that voice traffic had flattened out and that the growth would come from data transmission and, especially, video: Video uploading, downloading, conferencing, video on demand. The video revolution and its huge appetite for bandwidth would fill the phone companies' pipes to the bursting point and the freight fees would shower investors with riches.
So the companies loaded up on debt and spent lavishly to improve their networks. If they didn't spend, new competing carriers and the cable companies would. Investors demanded growth, and Wall Street was eager to finance the effort. Some companies went one step further and bought content -- in BCE's case, it was CTV and The Globe and Mail -- to add some sparkle to their growth strategies. France Télécom and Deutsche Telekom, for their part, loaded up on stupidly expensive wireless licences.
By last year, the nightmare scenario was unfolding like a slow-motion train wreck. Video and other broadband-hungry services did not, in fact, meet with hot demand, and the phone companies found themselves in a bind. They were stuck with a commodity business -- that is, prices would only go down -- at a time when capital expenditures were unusually high. It gets worse. At the same time, customer connections sold by the largest carriers were falling, thanks to competition from cable modems and cellphone networks. North River Ventures, a New York telecoms consultancy, estimates that Verizon and the rest of the Big Four have been losing 1 per cent of their customers every quarter for the past two years. This doesn't sound like much, but it comes at a big cost. If you take the total capital expenditures divided by the net number of new lines, the figure reveals that the companies are actually spending capital to disconnect customers.
How to get out of this trap? Faced with negative free cash flow, the solution is to slash capital expenditures. Doing this, of course, presents other problems. If capital expenditures vanish, then upgrades vanish with them, leaving the subterranean networks incapable of meeting the demands for broadband video services, such as DVD burning, which will inevitably come. This, in turn, creates another trap. If the capital structure doesn't exist to keep upgrading the network, the capital structure itself will have to be changed. Debt will have to be eliminated, costs will have to come down. This is why the European and American phone companies face massive financial restructurings. Mergers will be inevitable.
And BCE? BCE also has negative free cash flow; the money it pays out in capital expenditures and dividends is more than it takes in. It too overpaid for acquisitions, notably Teleglobe, which are proving a net drain on the parent. And it appears to be losing market share. Bell Canada's residential and business line market share fell from 96.8 per cent in the first quarter of last year to 95.8 per cent in the past quarter.
This does not mean that BCE is doomed. It, unlike most of its rivals, has a strong brand name in Bell and uses it well. While it is losing local market share, its high-speed Internet access business is growing fast. It also has a newish top layer of management that is probably asking all the hard questions. But this does not mean BCE is saved, either. At minimum, a potentially gruesome financial re-engineering effort seems in store, one that may come with a dividend reduction. The fate of BCE's rivals says things will get worse before they get better.
ereguly@globeandmail.ca |
