European financiers debate telecommunications funding
Despite the worst times that anyone in the telecommunications sector can remember, December's Financial Times World Telecoms Conference in London drew the same number of delegates as the previous year's event. A key question that speakers and delegates wrestled with was "When will the capital markets reopen to telecom?"
Wouter Moerel, director of the Carlyle Group (London)—the world's largest private equity company, which focuses mainly on early-stage venture capital buyouts—emphasized that his company is involved in more than just the "opportunistic acquisition of distressed assets" but increasingly in corporate equity finance. Current themes in telecom, he said, include:
- Overcapacity in many subsectors (with space for only two or three competitors in any one market).
- Past lack of focus on return on capital, which was in oversupply.
- The difficulty for an alternative carrier to beat an incumbent.
During the bubble, European carriers rushed to be the first to market with new services. But the financing was unsustainable, especially after the cost of regulatory license fees for wireless. While broadband has now taken off, pay TV is in crisis.
Telecom revenues per bit fell 19% in 1998 and 23% in 2000 and are forecast to fall 27% in 2002 and 28% in 2004. If operating expenditure per bit isn't reduced accordingly, the results could be "nasty," says Moerel. "I wouldn't rule out further collapses."
For alternative operators, there is still tremendous opportunity in the local loop, but unbundling is "not happening to a significant extent"—incumbents still control most access to the last mile.
While investment is mostly via private equity in the United States, Europe is "light years behind," Moerel states. Whereas Ireland's Eircom is the "most intriguing example of where private equity has taken a leadership role," in his opinion, that is "impossible" with Deutsche Telekom and France Telecom. "There are few players likely to be left in the EU [European Union]," he concludes. Nevertheless, Carlyle has been working with corporate partners such as NTL on corporate finance solutions.
Aidan Fisher, vice president-senior analyst for Moody's Investors Service, concurs that incumbents will retain a leading market position, since they still have a 70% share of traffic. Total European telecom capital expenditures (capex) will fall from 69 billion euros in 2001 (23% of revenue) to 61 billion in 2002 (18%), before rising slightly to 64 billion euros in 2003 (18%) and 63 billion in 2004 (16%). In particular, Deutsche Telekom's capex have fallen from 23 billion euros in 2000 to 11 billion in 2001 and will be about 8 billion in 2002.
But while some companies are reducing capex below 16% of revenue, Fisher reckons it should maybe be lower still, perhaps 10-12%. Operators don't need to spend much more on fixed line, while maintenance spending is less, he says.
However, a change in the industry is that most incumbents now have different management teams with "defensive capabilities," with an emphasis on generating cash flow despite declining revenue streams via cost reduction. External funding will be lower over the next three years. For the next 12 months or so, companies will focus on cutting costs and reducing debt, Fisher says. Some incumbents might continue to make small acquisitions to complete their footprints. There will be some mergers among the smaller incumbents, while further consolidation or restructuring is expected among newcomers. But no significant further mergers are foreseen among the large incumbent operators. In the meantime, in the next 12 months before restructured competitors emerge, there is a "competitive window."
In Europe, the banks have been supportive. KPN had a 2.25-billion-euro bank facility before its 5-billion-euro equity issue; Sonera had a 1.33-billion-euro bank facility before its 1-billion-euro equity issue, while Deutsche Telekom successfully launched 5 billion euros in new bonds despite WorldCom's collapse. Liquidity should be less of an issue in 2003 than in previous years: Telecom debt has fallen from its peak of 270 billion euros in 2001 through disposals, etc.
However, Moody's still factors implicit government support into its ratings. The level of government ownership is 34.7% for KPN, 52.8% for Sonera, and 55.5% for France Telecom. While government support has been a savior for European incumbents as others have fallen by the wayside, the level of government ownership is generally decreasing. So a more open funding model may be needed in the future.
Mark Telford is deputy editor of Lightwave Europe.