Deutsche Telekom Chief Executive Officer Rene Obermann is refocusing the Bonn-based company around Europe and increasing network spending in its home market after agreeing to sell the customer-losing T-Mobile USA business. The stagnant French market is pushing France Telecom CEO Stephane Richard to scour Africa and the Middle East for further acquisitions.
France Telecom, based in Paris, said today first-quarter sales from its three biggest European markets shrank 1.8 percent to 7.53 billion euros ($11 billion). Deutsche Telekom, Europe’s biggest phone operator, may report this week that revenue from Europe fell 3.2 percent to 9.86 billion euros, according to the average estimate of 12 analysts compiled by Bloomberg.
“The two companies approach the topic from a completely different angle,” said Bruno Lippens, who manages about $11 billion in a telecommunications fund at Pictet Asset Management in Geneva. “France Telecom is essentially being kept from reducing labor costs by the French government. If you are operating in a market where margins are limited in this way, the only thing you can do is to have more growth, and that’s forcing them into emerging markets.”
Telecom Italia, Telefonica
Deutsche Telekom, which releases earnings May 6, may say net income fell 30 percent to 538 million euros, according to analyst estimates. Telecom Italia SpA, scheduled to report a day earlier, may say profit climbed 1.7 percent to 611 million euros, helped by growth in Brazil and Argentina. Telenor ASA, the Nordic region’s biggest phone operator, and Swisscom AG also report this week. Telefonica SA will release earnings next week.
Royal KPN NV, the former Dutch phone monopoly, surprised shareholders on April 21 by cutting a full-year profit forecast and announcing as many as 5,000 job cuts, underscoring the deterioration in its home market. Unlike rivals with a presence in emerging economies, KPN’s only major assets outside the Netherlands are in Germany and Belgium.
Deutsche Telekom has gained 16 percent this year, the second-best performance on the 21-company Bloomberg Europe Telecommunication Services Index, which added 2 percent. Telecom Italia rose 4.9 percent, while France Telecom was up 1.3 percent. Hellenic Telecommunications Organization SA, the Greek phone also known as OTE and controlled by Deutsche Telekom, was the best performer with a 28 percent increase.
Morocco, Iraq
Deutsche Telekom slipped 0.8 percent to 11.19 euros at 12:23 p.m. in Frankfurt, giving the company a market value of 48.3 billion euros. France Telecom lost 0.5 percent to 15.79 euros on the Paris exchange, valuing the operator at 41.8 billion euros.
France Telecom’s emerging-market assets are taking on a larger share of revenue as economic growth in those markets outpaces that of Europe.
Sales in the Middle East and Africa, excluding Egypt, climbed 5.8 percent in the first quarter. Revenue from France, which contributed to half of the group’s total, fell 2.6 percent to 5.6 billion euros. The company last year set a target of doubling its overall emerging-market revenue by 2015, from about 3.3 billion euros in 2009.
African Growth
First-quarter earnings before interest, taxes, depreciation and amortization slipped 1.3 percent because of a consumer tax that took effect this year and the unrest in Egypt, France Telecom said today.
Since taking over in March 2010, CEO Richard has led France Telecom to acquisitions in Morocco and Iraq, adding to businesses in Jordan, Egypt, Senegal, and the Ivory Coast. He has said the company may spend as much as 7 billion euros on deals focused on the region, while in France it prepares for the entry of a fourth French mobile operator next year.
“Africa is probably the last growth market for telecoms -- even in Latin America you already have quite a high penetration rates,” said Leon Cappaert, who manages about 320 million euros in assets at KBC Asset Management in Brussels. “If attractive assets come on the market, there will be lots of competition.”
France Telecom is reviewing its European portfolio, Chief Financial Officer Gervais Pellissier said on a conference call today. Aside from France, Poland, and Spain, “all the other countries are involved in this review,” which will examine opportunities for consolidation as well as possible sale of operations, he said.
Eastern Europe
Deutsche Telekom, by contrast, has ruled out acquisitions in Africa and Asia and is concentrating on growth in new data and network services and turning around southern and eastern European units after agreeing to sell T-Mobile USA to AT&T Inc. in March for $39 billion.
Obermann reported a surprise fourth-quarter net loss because of writedowns on Romanian and Greek assets. Deutsche Telekom has spent 3.8 billion euros since 2008 to acquire 30 percent of OTE, seeking to tap growth in its Romanian, Bulgarian and Albanian markets. The Greek government is planning to cut its remaining 20 percent stake this year.
The decline in European sales excluding Germany will probably slow in 2012, while adjusted earnings before interest, taxes, depreciation and amortization will remain stable, Deutsche Telekom said in its annual report published Feb. 25.
“In eastern Europe the challenge is to stabilize revenue,” said Heinrich Ey, who manages a 65 million-euro telecommunications fund at RCM/Allianz Global Investors in Frankfurt. “There are plenty of construction sites even without the U.S., and it would already be a great achievement if the company manages to turn around the markets in the region.”
Per-User Revenue
Both companies are looking for ways to offer higher-end services in European markets while cutting costs. In Germany, Deutsche Telekom has pledged 10 billion euros through 2012 to build next-generation wireless and fiber-optic networks. It’s pushing its Web TV service Entertain and the use of smartphones to compensate for customers canceling fixed lines.
France Telecom and Deutsche Telekom last month announced a joint purchasing venture, aiming to save 1.3 billion euros a year. The pact is of greater urgency for France Telecom, as the German rival has “more freedom to address all the lines in their profit and loss statements,” Pictet’s Lippens said.
Increasing revenue in Europe will be a challenge. Deutsche Telekom’s wireless average revenue per user, or ARPU, declined or was stagnant in most European markets. More of the region’s phone users have dropped more profitable contracts in favor of pre-paid cards.
“Smartphones have been shown not to be a blessing,” said John Strand, owner of Copenhagen-based phone company adviser Strand Consult. “They increase revenue, but also increase costs, and there’s no link between costs and revenue in a positive way. Mobile broadband doesn’t generate enough cash flow to compensate for the pressure you see in the market.”
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