European Telecoms, Pinched by Downturn, Post Big Losses
Europe’s telecommunications titans continue to struggle with the continent’s steep downturn, with two reporting steep losses Tuesday while two others saw their credit ratings cut.
London-based Vodafone Group, Europe’s largest mobile phone company, said its fiscal first-half loss more than doubled to $14 billion as it wrote down the value of acquisitions from a spending spree.
Bonn-based Deutsche Telekom, Europe’s largest phone company, said it expects Deutsche to post the first full-year loss as a publicly traded company.
And Standard & Poor’s Corp. cut the long-term debt ratings of Paris-based Alcatel, Europe’s fourth-largest maker of phone equipment, and Stockholm-based Ericsson, the continent’s biggest supplier of wireless networks.
All are trying to cut costs to deal with a dramatic downturn in demand, which followed significant expansions.
However, Vodafone beat market forecasts by posting a 46% rise in operating profit. Earnings before interest, tax, depreciation and amortization (EBITDA) climbed to $4.21 billion, including its share of subsidiaries and joint ventures. Analysts had forecast an EBITDA of $4 billion to $4.16 billion.
For Vodafone, the loss in the period ended Sept. 30 compares with a $6.8-billion profit a year earlier. The British company wrote down nearly $7 billion in the six months ended Sept. 30, mostly from its $164-billion acquisition of Mannesmann in April 2000.
Vodafone, led by Chief Executive Chris Gent, has made more than $200 billion in acquisitions since 1999.
“Gent’s been the great dealmaker, and now he’s got to be the great manager,” said Alan Beaney, who helps manage $592 million at Principal Investment Management Ltd. and holds Vodafone shares. “He’s got to show he can run the businesses efficiently.”
Benedict Evans, an analyst at WestLB Panmure, rates Vodafone a “buy.”
Vodafone’s first-half pretax profit of $4.3 billion before goodwill amortization beat Evans’ estimate of $4.2 billion. The company’s current market value of $176 billion is more than 50% below its peak in March 2000. Vodafone was Europe’s largest company by market value at its height, though it now trails BP.
The loss at Deutsche Telekom, which was expected by analysts, totaled about $970 million in the first nine months, including one-time items.
In past years Deutsche Telekom has sold assets including cable networks and real estate to post a profit as it spent $883 million on acquisitions and bought new phone licenses in Europe for $15 billion. Deutsche Telekom spokesman Hans Ehnert said the sale of Deutsche Telekom’s last networks to Liberty Media Corp. for $5.5 billion can’t be completed until it gets cartel office approval next year.
One-time items this year include $3 billion from the sale of its shares in Sprint Corp., the U.S. company’s wireless unit, Sprint PCS, and a network in the German state of Baden-Wuerttemberg. Deutsche Telekom also took a $353-million charge for its holding in rival France Telecom.
S&P; cut the long-term debt ratings of Alcatel and Ericsson by one notch because demand for network gear continues to slacken. Alcatel’s credit rating was cut to “BBB,” two notches above junk, while Ericsson’s long-term credit rating was cut to “BBB+.” S&P; kept its “negative” outlook for both companies.
The cuts were prompted by “market conditions” in the telecommunications equipment industry that “are expected to further deteriorate in Continental Europe and continue to be very weak in the U.S. until at least the first half of 2002,” S&P; said in a statement.
Telecom equipment makers have suffered this year as European phone operators have cut spending after shelling out a collective $100 million for licenses to build faster mobile networks.
The reductions come after both companies reported a loss in the third quarter.
Ericsson is facing its first annual loss in more than half a century. The Swedish company lost $374million in the third quarter and expects sales will fall as much as 10% next year as phone companies curb spending.
