LEX COLUMN: Cash flow Financial Times; Dec 03, 2002
Europe's heavily indebted companies are still some way from leaving their burdens behind them. Deutsche Telekom is still picking at the edges, and the likes of France Telecom and Ahold have yet to look their problems in the eye. Yet the turnround has begun, with telecoms companies and some carmakers starting to generate significant amounts of cash. Morgan Stanley credit strategists calculate that BT, Telecom Italia, KPN and DT between them generated €5.2bn of free cash flow in the third quarter, even after dividend payments. If they could keep this pace up, the four could produce enough cash to eliminate their net debt within five years.
They are, of course, unlikely to keep this pace up. Much of the improvement in cash flow comes from a reduction in working capital. This improvement may not be reversed - some companies have taken inventory management measures that should yield sustainable gains - but they are also unlikely to be repeated. Dividend cuts, too, are not readily repeatable. And although capital expenditure can be kept down, it will be hard to combine low capex with high margins - a trick several telecoms companies managed in the third quarter - for long.
What this shows, nevertheless, is that most large, investment grade companies have choices. By exercising those choices in favour of a stronger balance sheet, they have benefited their bondholders. In part, this has come at the expense of shareholders. But shareholders, too, will benefit from a stronger emphasis on cash generation.
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