OTE must not dither over RomTelecom decision

A few months ago the newly elected top management of Greece’s incumbent telecommunications operator OTE took the right decision not to get more deeply involved in risky wireline Balkan projects by not bidding for a majority stake in Bulgarian incumbent BTC. That decision was greeted with enthusiasm by the investment community in Greece and abroad. This time, OTE’s top management is facing another test – either to persuade the Romanian authorities to accept its restructuring plan for incumbent RomTelecom or write off its investment and walk out of that country. Whatever the decision may be, OTE should make sure it is taken soon and not be dragged into endless negotiations. OTE shares came in for some heavy selling from foreign institutional investors last week, shedding some 11.2 percent and underperforming the Athens Stock Exchange general stock index. Given OTE’s large weight in the composite stock index, it was no surprise that it lost 4.84 percent, falling below the 2000-point psychological level on Friday. Undoubtedly, soft first-half financial results have contributed to the stock’s derating and a number of well-known foreign investment banks have moved to downgrade their recommendations and lower their 12-month price targets. Salomon Smith Barney cut its price target for OTE shares to 16 euros from 19 euros on August 29 and Credit Suisse First Boston (CSFB) downgraded the stock to neutral from buy, setting the price target at 14 euros. Deutsche Bank also cut its price target to 17 euros from 19.3 euros before. The Greek telecommunications operator posted a decrease of 11.3 percent in consolidated operating profit (EBITDA) in the second quarter vis-a-vis the same quarter a year earlier and a 25.2-percent fall in net income to 109 million euros in the same period. Although group revenues rose 4.5 percent year-on-year in the second quarter, a breakdown showed revenues from domestic telephony falling 3.1 percent and international telephony 4.3 percent while mobile revenues rose an impressive 40.8 percent. The effect of competition on domestic fixed line telephony was evident for the first time, with total calls falling 8.2 percent year-on-year in the second quarter. Analysts and brokers say the soft first-half results and especially the deteriorating trend in the second quarter have cast doubts on OTE’s ability to pay the same dividend, 0.70 euros per share, it paid to shareholders for fiscal year 2001. Based on Friday’s closing price of 12.18 euros, this amounts to a hefty dividend yield of 5.75 percent. However, the same analysts say OTE cannot pay the same dividend this year without resorting to partial borrowing, which is not something greatly appreciated in capital markets. In addition to this, the status of OTE’s investment in RomTelecom has come under scrutiny. OTE and the Romanian government reportedly signed a framework agreement on June 27, 2002. According to analysts, OTE, which holds a 35-percent stake in the Romanian telecoms operator, was scheduled to make an equity contribution of up to 200 million dollars on September 6. However, this capital increase was not implemented and no public announcement was made. OTE was also supposed to provide 250 million dollars in debt financing on December 31, 2002. The Romanian government was also supposed to make a number of changes in the charter of RomTelecom and push for changes in the legislation regarding privatizations. Needless to say, the implementation of RomTelecom’s restructuring plan would have raised OTE’s stake to 51 percent, making it the major shareholder. The Romanians reportedly have dragged their feet so far and the restructuring plan has yet to be implemented. OTE’s CEO, Lefteris Antonakopoulos, will reportedly be visiting high-level government officials in Romania this week to clarify some issues and may even threaten a complete writeoff of OTE’s investment in a bid to stir things up and have the restructuring process going. OTE, which paid 675 million dollars to buy a 35-percent stake in RomTelecom a few years ago, wrote down part of its investment there in July, some 260 million dollars. With CosmOTE, its mobile subsidiary, slowing down, there is no doubt that OTE needs a growth driver for the years ahead. It is clear, however, that its foreign investments, long regarded as potential growth drivers, have turned out to be a burden. RomTelecom is no exception. But it operates in an under-developed telecoms market and could therefore become the engine of growth for OTE’s group despite its higher operational risk. However, this cannot be accomplished if RomTelecom, facing market liberalization next year, continues to operate as it does today. In that case, RomTelecom, an inefficient telecoms operator with a low EBITDA margin, cannot hope to survive the competition and therefore it makes no sense for OTE to be there. This is something Antonakopoulos has to make clear to his Romanian counterparts. OTE shareholders have carried a lot of baggage over the years. This cannot continue for ever. It is high time for action on all fronts and especially RomTelecom. Maximizing OTE shareholders’ value should be the ultimate goal of its top management. RomTelecom offers them the opportunity to prove it again soon.

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