Fixation on Romania?

Ever since its debut on the Athens Stock Exchange in 1996, OTE, Greece’s incumbent telecoms operator, has been characterized by a host of Greek and foreign analysts alike as one of the cheapest firms in the European telecommunications sector. Yet its proclaimed defensive characteristics, that is a comparatively low price-to-earnings ratio (P/E), a respectable dividend yield and a healthy balance sheet, have not helped its shares from falling again to an historic low over concerns about its earnings outlook and risk profile. The release of 2002 financial figures last Thursday, which prompted a fresh bout of selling, and dragged the Athens bourse lower, highlighted once again concerns about its domestic fixed-line telephony market share and the future of its international investments. OTE’s share price has taken a beating since last summer on the back of an unexpected write-down of its investment in Romtelecom, Romania’s incumbent operator, which hit its 2001 profit at a time accounting corporate scandals were surfacing in the USA. Following unsatisfactory financial results and the multi-month saga of its new investment in Romtelecom, OTE shares slid 3.44 percent to close at 10.10 euros on Friday, below its 1996 IPO price, as investors cited an unexpected drop in 2002 net income and renewed concerns about fresh share market losses in domestic fixed-line telephony. OTE’s consolidated revenues rose 5.9 percent year-on-year in 2002 and reached 4.312 million euros while earnings before interest, taxes and depreciation (EBITDA) were up just 1 percent versus a year earlier. Both measures were broadly in line or slightly below consensus figures. However, it was the 9.4 percent year-on-year drop in net income to 358.1 million euros which really made the difference since it was some 14 percent below the consensus figure of 415 million euros. Higher operating expenses, a higher-than-expected impairment charge, a higher effective tax rate and lower-than-expected revenues from fixed telephony contributed to this outcome. OTE had posted net income of 395.2 million euros in 2001. Market share erosion There is little disagreement that the liberalization of the Greek fixed-line telecommunications market will erode OTE’s market share and hit its revenues from that source. Indeed, its market share fell in 2002 with the losses estimated around 4 percent in volume terms at end-2002. OTE officials told analysts last week they expect market share loss to average 8 percent in 2003 versus an average 2.5 percent in 2002 as alternate telecoms operators take a larger bite, especially in domestic long-distance and international calls. Competition is expected to heat up this year since Tellas, the joint venture of Greek Public Power Corporation (PPC) and Italy’s Wind, viewed by most analysts and executives in the industry as the major threat to OTE’s dominance in the fixed-line business, joins FORTHnet and others in offering fixed-line telecom services in the pursuit of market share. In addition to the threat posed by the alternate telecoms carriers, OTE has to deal with another problem: fixed-to-mobile substitution, which threatens its revenues from fixed-line telephony as mobile tariffs come down and usage picks up, aided by Greeks’ lifestyle converging with Western European norms. Although OTE is well represented in the wireless business with CosmOTE, it cannot hope that all customers substituting fixed for mobile phones will end up in the OTE Group, since CosmOTE commands a respectable 45 percent of the domestic mobile market. Moreover, OTE did not choose to buy part or all of the 18 percent stake in CosmOTE owned by Norwegian Telenor a few months ago when CosmOTE’s share price was trading much lower. This that may have been due to its decision to beef up its equity stake in Romania’s incumbent operator Romtelecom at the time and its desire not to endanger its credit rating status by borrowing excessively. OTE finally agreed to participate in a 243-million-dollar share capital increase in Romtelecom in the form of a 145-million-dollar cash injection and 98-million-dollar debt-to-equity swap. It also paid 31 million dollars to acquire an additional 3 percent stake from the Romanian government, to end up with a 54 percent stake in Romtelecom. Risky investment Even today, many analysts express reservations about OTE’s decision to buy a majority stake in Romtelecom despite the fact that its executives should have known that the degree of fixed-line cannibalization in Romania by cellular operators was high. Still, an entry into the Romanian mobile market is considered a must although it entails higher risks now. Perhaps aware of this, OTE’s CEO told Reuters on Friday that OTE has appointed Deutsche Bank to seek new opportunities in the Romanian market, including a mobile acquisition worth up to 500 million euros. It is noted that Romtelecom’s mobile arm Cosmorom is regarded by all analysts as a failure and few think it is worth putting more money into it. Similar concerns have been voiced about OTE’s other international investments, such as that in Armentel. The poor performance of OTE shares lately are clearly linked to its 2002 earnings announcement as well as its risk profile, which has been enhanced by the recent decision to increase its equity stake in Romtelecom. Since market-share erosion in the domestic fixed-line telephony market was inevitable in view of the liberalization, OTE’s top officials should have made wiser choices on other issues such as the case of CosmOTE a few months ago and Romtelecom. Unfortunately, they did not. As a result, Romtelecom’s suppliers were satisfied but OTE’s shareholders were unhappy.

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