Small European Phone Companies Scale Back Plans as Funds Shrink
By Anjana Menon
London, Jan. 20 (Bloomberg) -- Smaller phone companies in Europe, struggling to preserve cash, are scaling back expansion plans as France Telecom SA and other bigger rivals soak up funds in the debt and equity markets.
Redstone Telecom Plc, a U.K. based provider of phone services, said it'll offer faster Internet access to only half the locations it was planning two months ago. FirstMark Communications Europe SA and Viatel Inc. will fire staff and be in fewer European cities to make their money last longer.
``When you can't be sure of refinancing, you really don't want to take on debt,'' said Robert Cushing, chief financial officer of Redstone, in an interview. ``This is not an attractive market for smaller-cap debutant companies.''
Last year, Deutsche Telekom AG and rivals raised a record $390 billion issuing stocks, debt and taking bank loans to help pay for new mobile phone licenses and make acquisitions. Investors have grown concerned about the industry's ability to pay back debt, particularly smaller and newer companies.
Shares of European phone companies lost a third of their value on average last year. That was as their credit ratings fell and financing costs rose. Cushing said Redstone can still find investors, but at a cost that is more than he is willing to pay.
When Deutsche Telekom AG sold $14.5 billion of bonds in June, it paid 215 basis points more than Treasuries to persuade investors to buy its $3.5 billion of 30-year dollar bonds. By the time British Telecom sold $2.8 billion of similar bonds last month, it had to pay an additional 85 basis points.
Cracking Under Pressure
Unprofitable Redstone said yesterday it was scaling back business plans so it won't have to borrow 50 million pounds, and pay an even higher price refinancing it.
``These are the first signs that these guys (smaller phone companies) will crack under pressure,'' said Saeed Baradar, an analyst at Bear, Sterns & Co. in London. ``In the first half of the year we'll see cutbacks in spending and by the second half a lot of them will fall off the map altogether.''
In the past three years, opening the European phone market to competition has spawned dozens of newer phone companies such as Fibernet Group Plc and Thus Plc who are offering high-speed Web access to customers.
The Bloomberg Telecommunication Services Index gained 84 percent in 1999, buoyed by optimism about the phone companies' plans to build new networks and capture customers.
FirstMark, a Luxembourg-based telephone company, which six months ago secured a $1 billion loan, said it will close its London headquarters. Firing a total of 145 people, its money will last up to 12 more months, the company said this week.
Backed by investors such as Morgan Stanley Dean Witter, Goldman, Sachs & Co., ABN Amro, France's Groupe Arnault, the company's strategy was called a ``textbook example'' for phone companies by some analysts when it presented its plan in June.
Closely held FirstMark's board includes former and present executives from Deutsche Telekom AG's One 2 One, Lazard Freres & Co, Airtel SA, Suez Lyonnaise des Eaux SA and N.M. Rothschild & Sons Ltd.
Prudent Times
FirstMark, which was planning to offer radio communications and access to the Internet to homes and businesses in Europe's biggest markets will now offer them only in Spain, France, Germany and Luxembourg. It will stay out of Italy and the U.K.
Our ``access to funds isn't as good as it was six to 12 months ago,'' said Donal Byrne, the chief marketing officer of FirstMark, whose chief executive will step down in four months. ``It's a time to be prudent.''
Yesterday, Moody's Investors Service said more companies with non-investment grade ratings are selling bonds and investors need to be increasingly wary of defaults. Atlantic Telecom Group Plc is rated `B-' by Standard & Poor's. That's 10 notches below the rating for British Telecommunications Plc, the U.K. former monopoly and biggest traditional phone company, and six notches below investment-grade debt.
There may be ``setbacks in the nascent'' non-investment grade markets, the rating company said in a report. ``More defaults may occur among issuers that are dependent on continued access to funding.''
The average yield premium on non-investment grade bonds to government debt more than doubled in the last 12 months.
Making Cash Last
Thursday, Viatel Inc., a provider of telecommunications services, said it will cut its workforce by about 30 percent, or about 700 jobs, as part of a plan to focus on its faster-growing corporate and broadband business.
The company plans to close residential-service units in Austria, Greece, Italy, Canada and Spain, spokesman Glenn Davidson said. Viatel will focus on corporate services in France, Germany and the Netherlands, while maintaining all services in the U.K., U.S., Belgium and Switzerland, he said.
``The markets are closed down to telecom funding and phone companies want to make cash last as long as'' they can, said Byrne.
France Telecom will be the first major test of investor sentiment in the equity market this year as it tried to sell shares in its wireless unit, Orange SA. France Telecom aims to raise $7 billion from the sale, half its original expectations.
COMMENTS: CLECs are going the way of the Dodo bird. No matter what last mile they implement. |
