If somebody asks a local investor to explain why the Athens bourse has not done better this year, he or she will give you a number of reasons. If the same investor is asked to blame a stock for holding back the main stock indices, he or she will most likely point a figure at the incumbent telecoms operator, OTE. Indeed, OTE’s stock has been one of the worst performers in the European telecommunications sector and a drag in the local stock indices on the back of poor operating performance. All analysts and industry officials agree that tackling costs and rationalizing international investments should be high on the management’s agenda. However, with general elections just a few months away, it is unlikely that OTE’s current management will take steps in this direction. It is nonetheless reasonable to expect that these steps will be taken after the elections, making OTE a likely post-election turnaround story to watch. OTE, until recently Greece’s largest company by market capitalization, was widely viewed as a defensive stock offering limited growth potential by foreign institutional investors until a year ago. This view apparently started changing in the summer of 2002. Disappointing first-half financial results announced in August 2002 coupled with what was seen as confusing and inconsistent moves in OTE’s deliberations with the Romanian side in obtaining a majority equity stake RomTelecom, which it finally did, convinced some key foreign investors to abandon the ship, driving the stock sharply lower in the process. The stock, which was trading around 15 euros on August 20, 2002, ended the year at 10.50 euros and has been unable to recover ever since. Rising debt In the meantime, the company’s strong point, its low levels of debt, started changing as well. OTE’s debt has been on the rise due to significant working capital outflows, the need to recapitalize its international subsidiaries and to maintain high capital investment spending. In addition, the company was forced to borrow to pay a dividend per share of 70 cents for fiscal 2003 this summer, augmenting its debt and raising concerns about the sustainability of its dividend policy. This is mainly the result of unwise international investments taken over the years. It is noted that OTE has a controlling stake in RomTelecom, the Romanian wireline telecoms incumbent, Armenia’s telecoms operator as well as a minority stake in Serbia’s telecom monopoly. It also has equity stakes in wireless operators in Romania, Bulgaria and the Former Yugoslav Republic of Macedonia (FYROM). Its largest investment is in Romania where Cosmorom, the mobile arm of RomTelecom, has been struggling with no light seen at the end of the tunnel, and where RomTelecom itself has been undergoing restructuring but has not delivered significant results so far. Market share loss OTE’s most important weak point so far has been its domestic wireline operations where it has lost market share to competitors in excess of 7 percent year-on-year, while fixed traffic volumes have dropped even faster. By offering cheaper prices to customers, alternative carriers have been able to attract them away from OTE. This despite the fact that OTE’s interconnect rates are higher than the EU average, which should put pressure on their margins. Part of the explanation lies with GSM gateways which alternative carriers install into their switches, making it possible to convert fixed-to-mobile traffic into mobile-to-mobile, for which they pay a lower termination fee. This allows competitors to make money and pass part of the savings to their clients. Nevertheless, aggressive competition by a number of alternative carriers has not been the only problem so far. Fixed-to-mobile substitution has made things even worse and has accelerated as mobile tariffs are coming down. OTE realized the problem quite late and has recently tried to tackle it by offering to buy the 9.0 percent stake Norwegian Telenor owns in its local mobile subsidiary CosmOTE with a view to absorbing the leading wireless operator in Greece at a later stage, following the France Telecom-Orange model. Need for cost cuts Although analysts expect OTE to keep on losing market share in the fixed telephony market before its market share stabilizes at around 80 percent, they say the answer is for OTE to cut operating costs to match declining revenues. This has been a prohibitive exercise for the management though, because it entails some political costs. Lefteris Antonakopoulos, OTE’s current CEO, suggested such a move on Friday. Speaking at a conference in Madrid, Antonakopoulos was quoted as saying that OTE wants to increase the number of fixed lines per employee to 450 from 350 at present over the next two years. According to Bloomberg, this translates into some 4,000 layoffs out of 17,000 currently working at OTE. Of course, this is a sensitive issue, especially as the country heads towards general elections in the spring of 2004. It is very likely, however, that after the elections, whatever the outcome, OTE’s new management will pursue a restructuring policy along these lines and may include an early retirement scheme. What is not clear yet is how fast these cuts will bring in benefits and whether the social security system will be able to absorb a high number of retirees. This in turn means that the new management will have no choice but to proceed with some cuts in personnel costs, even at a lower scale. There is no doubt that OTE looks like an aging giant with many health problems at this point. This makes it less attractive to Greek and international institutional investors. This does not mean, however, its problems cannot be tackled and solved effectively. The market is likely to start discounting this possibility as elections approach, counting on a new management to produce a turnaround story based on a combination of canceling unsuccessful operations abroad, cutting capital spending and/or dividends, and above all restructuring the fixed-line business by having any cost cuts more than match revenue losses.