Romtelecom’s downside

The likelihood is increasing that telecoms operator OTE will need to consolidate Romtelecom in a move that could have a negative impact on its share price and earnings before interest, tax, depreciation and amortization (EBITDA), investment bank Schroder Salomon Smith Barney said in a research note yesterday. Locked in negotiations with the Romanian government since the beginning of the year, OTE early this month said it had gained Romania’s agreement to its assumption of a majority stake in Romtelecom, the fixed-line monopoly. It currently holds a 35 percent stake, acquired in 1998. Under the terms of the agreement, OTE is due to inject $243 million into Romtelecom, part of which includes a loan of $50 million, given to the Romanian operator previously, which will now be converted into equity. It is also set to purchase further shares from the Romanian government. Assuming that OTE acquires control or more than 51 percent of Romtelecom, it will need to integrate the Romanian company into the group. «Consolidation or not doesn’t affect net income, but OTE’s EBITDA and EBITDA margin will clearly deteriorate,» SSSB warned. The fallout could even spread to OTE’s share price. Concerns over OTE’s Romanian investment, the flagship of its Balkan expansion, have hung over the stock since the beginning of the year with the shares losing 37 percent of their value. Yesterday, they fell by 2.57 percent to close at 11.38 euros. «On our sum-of-the-parts valuation, OTE’s 35 percent stake in Romtelecom is only about 6 percent of OTE’s enterprise value, including its injection of 243 million euros at face value,» SSSB said.

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