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Telecom Offers Set to Swamp Europe, Asia
Governments Plan to Unload More Than $24 Billion of Shares In National Phone Concerns
By DAVID PRINGLE
Staff Reporter of THE WALL STREET JOURNAL
LONDON -- Investors will be swamped next year with new telecommunications stocks, as European and Asian governments seek to exploit the rebound in the industry's fortunes to raise badly needed cash.
In Western Europe alone, analysts expect governments to offload about €20 billion ($24.97 billion) of shares -- about six times the figure in 2003 -- by selling stakes in national telephone companies. Many of the potential sellers need the money to make up for a shortfall in tax revenue following several years of lackluster economic growth.
For example, analysts expect the French government to sell at least €6 billion of stock in France Telecom that represents about 11% of the company's market capitalization and would increase the free float by about one-quarter. A state-owned German bank is also expected to sell at least €6 billion of Deutsche Telekom stock that represents one-tenth of the company's market capitalization and would increase the free float by about one-sixth.
To sell such large amounts of stock, investors and analysts say these governments may have to offer the shares at discounts, which is likely to put the value of the existing shares in these companies under pressure. Up to now such fears have been overshadowed by sharp improvements in telephone companies' profitability thanks to their recent cost-cutting. In Asia, the Chinese government is preparing an initial public offering of shares in China Network Communications Group, while the governments of Australia and Taiwan may also sell several billions of dollars of stock in their national phone companies if they can overcome political opposition.
European governments still hold $115 billion of telecommunications shares and Asian governments $180 billion, according to investment bank UBS Warburg. Some U.S. companies may try to get in on the share sale action, too: SBC Communications of San Antonio, for instance, is one of several companies that are expected to try to sell their own stakes in European telecom firms. Analysts say these placements could flood the market with as much as €5 billion more in shares on top of the government sales.
A test of investor sentiment is likely to come in the first half of 2004, when Belgacom, Belgium's national telephone company, is planning to launch an IPO valued at as much as €4 billion. Among the potential sellers is SBC, which has a 17.5% stake in Belgacom.
Institutional investors in London are casting an eye over Belgacom now, but some caution the company isn't big enough to be a "must-have stock" and the stock will have to be sold at a big discount to rivals.
Indeed, it may take deep discounts in other sales to get skeptical investors interested. "If there is a decent discount to the current share price, then there will be demand," says Oscar Andreu, senior telecommunication analyst at UBS Wealth Management in Zurich. He says 2004 could represent the best window of opportunity for government and other longtime stakeholders to sell some of their stock. By 2005, Mr. Andreu warns, competition from rivals using cost-effective new technologies, such as a way to route voice calls via the Internet, will force national telephone companies to slash their prices. As that trend becomes apparent to investors, it could hurt sentiment toward these companies, says Mr. Andreu.
Despite this medium-term threat, investors have been warming to the sector again in the past year following an intensive bout of cost-cutting by the leading companies. Investment bank J.P. Morgan expects the industry in Western Europe to throw off €39 billion in cash this year and it forecasts that almost €16 billion will be returned to shareholders through dividends and share buybacks next year. The Dow Jones European telecommunications index is up almost 40.96% this year, while France Telecom's shares are up 54.81% and Deutsche Telekom's shares are up 18.45%.
Even so, many investors still harbor fundamental doubts about telecom. One qualm: It isn't clear whether telephone companies serving increasingly saturated markets can keep growing steadily.
Dominic Baker, head of global telecommunications research for Threadneedle Investments in London, is worried that new technologies will drive down the price of telephone services, curbing revenues. As revenue slows, he says there is a risk that management teams will follow their predecessors and spend a lot of money trying to expand into new markets. Telecommunications companies "have done stupid things in the past," he says.
Mr. Baker says his firm is "underweight" in telecommunications stocks, but it has recently bought shares in some companies focused on the cellphone market, such as Vodafone Group and mmO2. In Asia, investors have similar concerns. "The technology and regulatory changes there have been huge. That's the risk for all these telco operators," says Sam Lau, manager of the Greater China Fund at Baring Asset Management in Hong Kong. "As a utility, we want a steady environment."
Individual or "retail" investors also are likely to be wary, given that many of them have little to show for participating in the last big round of privatizations. Despite big gains this year, Deutsche Telekom's share price is still trading below the price at which the German government first issued shares in the phone company in late 1996. Reinhild Keitel, a spokeswoman for a small-shareholders association in Germany called Schutzgemeinschaft der Kleinaktionäre e.V., says most retail investors in Germany have "reservations" about the telecommunications industry "because of the big disappointment about Deutsche Telekom."
Still, that is unlikely to stop cash-strapped governments trying to take advantage of the recent rises in telecommunications shares. The French government, which was forced to spend €9 billion to prop France Telecom last year, recently passed a law allowing it to take its stake in the national carrier below 50%. Investment bank Goldman Sachs reckons the government will seek to recover that €9 billion by selling down some of its stake in France Telecom next year. A spokesman for the French government declined to comment.
In Germany, the government recently sold 199 million shares in Deutsche Telekom, or 4.7% of shares outstanding, to the state-owned bank Kreditanstalt für Wiederaufbau. KfW now owns 700 million shares, valued at more than $10.16 billion, and analysts expect it to try and sell a big chunk of that stock next year. A KfW spokeswoman said any sale "will depend on the market." In the summer, KfW sold €5 billion of bonds that can be converted into the company's shares at a later date. Even this approach hit the value of Deutsche Telekom's shares in July, when the bond was sold. Still, some analysts expect KfW to try to sell actual shares next year.
The Australian government would like to follow suit, although Australian lawmakers rejected legislation allowing the government to sell its 50.1% stake in Telstra, the state-owned telecom firm, in October. A government spokeswoman says new legislation is likely to be presented to parliament early next year.
Representatives of China Network Communications met bankers in New York this month to discuss a planned offering of stock in that company and Israeli government officials were presenting a minority stake in Bezeq Israel Telecommunication to investors in London. The Chinese government has yet to announce the timing or the size of the China Network offering, but bankers expect it to try to raise between $1 billion and $3 billion.
The Israeli government plans to make a decision early next year whether to proceed with a Bezeq sale, but Eyal Gabbai, director general of the Israel Government Companies Authority, says he thinks the "timing is excellent."
The Israeli government and some of its counterparts in Eastern Europe aren't targeting the open market. Instead, they are looking to private equity investors, which are increasingly keen to snap up controlling stakes in smaller telecoms. Jim Attwood, head of the communications group at Carlyle Group, says: "We look for cash flows from a relatively low-risk business and, with some exceptions, telecommunications fits that bill." Carlyle Group, which is based in Washington, manages more than $16 billion in assets.
Mr. Attwood, a former executive at Verizon Communications, says the industry has a very different outlook from the one that took investors on a roller-coaster ride in the late 1990s. "There is not going to be overinvestment going forward," he says. "People have learnt their lessons -- trees do not grow to the sky."
--Evan Ramstad in Hong Kong contributed to this article.
Write to David Pringle at david.pringle@wsj.com
Updated December 31, 2003 2:46 a.m.
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