OTE needs urgent restructuring to boost share price and results
In 10 days or so, the third quarter of 2004 will be history without the long-awaited shake-up at OTE, the Greek telecoms incumbent, having taken place. Still, the investment community has been bidding up OTE shares the last few weeks or so, betting that the last restructuring story in the European telecommunications market will not become a lemon. It is a rather difficult call, though everybody recognizes the choices are limited and that the time for OTE’s restructuring is running out. Still, what is at stake here is not just OTE but the conservative government’s own agenda of reforms. Since its debut on the Athens bourse in the mid-1990s, OTE, the country’s incumbent telecoms operator, has developed a reputation for making a lot of promises it usually breaks later on, and producing disappointing financial figures and unpleasant corporate news. Although it is a societe anonyme, listed on both the Athens and New York stock exchanges, with the State holding a minority stake, OTE has always been prone to political interference, often run by people known better for their political affiliations and relations with OTE’s major suppliers than for their management skills. This has led to numerous staff appointments at all levels and a series of unwise investment choices in the international arena as well as questionable decisions in domestic procurement. Labeled a defensive stock by European telecoms analysts a few years ago due to its low debt levels and high dividend yield policies, it managed to scrap this reputation really fast and prove everybody wrong in a short period of time. It was the summer of 2002, in the middle of the accounting scandals in the US and less than a month since the State placed a significant equity stake of the organization with international institutional investors, when OTE unexpectedly announced the retroactive write-down of some of its international investments. Adding insult to injury, it moved to increase its stake in the main Romanian telecoms carrier, prompting foreign funds to jump ship, taking its stock down to about 10 euros at the end of the year from 18 euros just a few months earlier. Lack of judgment or inexperience? Whatever it was, the decisions left their mark in the stock of Greece’s perhaps most highly profiled company and cost the State hundreds of millions of euros in lost tax revenues and privatization proceeds, given OTE’s large weight in the Greek stock market indices. Still, the always hopeful telecoms analysts are willing to forget all this and give its new top management, headed by President and CEO Panayis Vourloumis, a well-respected, former senior banker, another chance to implement a far reaching restructuring plan. Like its predecessors, the new management appears to understand the need to overhaul its domestic fixed-line business and rationalize OTE’s international investments. Unlike its predecessors, though, it has focused on the sensitive issue of personnel reduction via a voluntary retirement scheme, targeting 5,000 or more employees. This, however, is not likely to go forward unless the total cost is reasonable, with OTE shouldering the burden, and unless the conservative government gives its blessing. Although the case for a sizable personnel reduction is sound, given that OTE has one of the worst efficiency metrics in Europe with less than 300 lines per employee versus 513 lines at Portugal Telecom as well as ominous projections of operating losses in its fixed-line business a few years down the road, according to Morgan Stanley, the situation is more complicated than it shows. First, OTE’s employees enjoy a status similar to civil servants, making the rationalization of the work force very difficult. Second, despite OTE management’s assertions that the contracts of some 4,000 temporary employees will not be renewed, knowledgeable sources say this may not be the case should these people take their case to court. Third, the new management appears to have alienated some of its natural allies within the organization by keeping in place high-level officials who either have a poor track record or are allegedly related to the organization’s past misdeeds. Nothing can show OTE’s disadvantage and potential for savings on personnel costs than a comparison with Portugal Telecom. At the end of 2003, Portugal Telecom’s market capitalization stood at 11.5 billion euros versus 6.10 billion for OTE, its EBITDA (earnings before interest, taxes, depreciation and amortization) amounted to 2.268 billion euros versus OTE’s 1.9 billion, and its revenues reached 5.77 billion euros compared to 4.94 billion for the Greek telecommunications organization according to brokerage Intersec SA, citing figures from Bloomberg. Still, the Portugal Telecom Group employed 25,000 people compared to 51,000 at the OTE Group. With the State holding more than 40 percent of OTE’s shares, the case for the government supporting Vourloumis’s restructuring plan is strong. After all, it will be able to sell a great chunk of its equity stake in OTE at a much higher price later on, receive a higher dividend on boosted profits, help avert the recording of operating losses in the future, improve sentiment on the Athens bourse and send a clear signal to other quasi-public organizations. This can be combined with mutually agreed changes at all levels of management intended to appease critics, both conservative and socialist, that the old mistrusted guard still runs the show. Unlike other southern European countries, the Greek State did not allow OTE to adjust its work force to the new environment created by the liberalization of the Greek telecommunication market back in 2001. Moreover, it chose to keep it hostage to the wishes of the politicians of the ruling party. This should change. OTE cannot survive if it does not restructure and cut its links with the past. The government must understand the first message and choose to put its weight behind OTE’s management plan to rationalize its work force while Vourloumis should understand the second message and not undermine his plan by sticking to an inflexible approach, which may have worked in a private sector company, but not at OTE.
