[eccr] Lower Goals for Telecom in Europe

Title: Lower Goals for Telecom in Europe

March 20, 2002

Lower Goals for Telecom in Europe

By EDMUND L. ANDREWS (NYTimes)


RANKFURT, March 19 ‹ Deutsche Telekom , Europe's biggest telecommunications company, has acknowledged that it will not reduce its debt as quickly as it had promised and has begun bracing for another reduction in its credit ratings.

The company announced Monday evening that it would cut its dividend by 40 percent.

It also said it was not going to achieve its goal of reducing debt to 50 billion euros (about $44 billion) from 62 billion euros until some time in 2003, a year behind schedule.

Europe's big telecommunications companies are all being forced to reckon with the huge liabilities they built up in their rush to expand geographically and to build advanced wireless networks.

Companies that thought they could dig out by selling off assets or by issuing more shares have found themselves trapped by falling stock valuations.

KPN, the Dutch telephone carrier, was so loaded with debt that it needed support from the Dutch government to float a new rights offering last year. KPN lost 7.5 billion euros ($6.6 billion) in 2001 after writing down 12.4 billion euros on its investment in E-Plus, a German mobile phone company.

France Télécom, which owes a total of 64 billion euros ($56 billion), is expected to report similarly large write-downs on Thursday and a big net loss in its year-end results for 2001. France Télécom's shares have dropped about 85 percent from their peak in March 2000.

Deutsche Telekom's balance-sheet problems are less acute than those of many European rivals, but they are serious nonetheless. The company had hoped to eliminate about $5 billion in debt by selling the last of its cable television systems, but German competition regulators blocked the proposed sale to Liberty Media (news/quote) last month.

There are few credible alternative buyers for the systems because many of the most ambitious cable operators in Europe are themselves struggling with high debt and big losses.

Analysts now predict that the most Deutsche Telekom will be able to get for its systems is about $4 billion and that the systems may take a long time to sell.

Telekom had also hoped to raise about 10 billion euros ($8.8 billion) by listing shares of its mobile-communications subsidiary. But company executives acknowledged today that the stock market valuations were too low to do that before the second half of this year.

Karl-Gerhard Eick, the company's chief financial officer, said the company would save about 1.5 billion euros this year by cutting the dividend. He also announced plans to reduce Deutsche Telekom's capital spending by 10 percent, to about 9 billion euros.

"I think that is realistic," said Frank Wellendorf, a telecommunications analyst at WestLB Panmure in Düsseldorf.

Companies can delay some investment in building advanced wireless networks, he said, because the consumer handsets needed to use them will probably go on sale later than expected.

Standard & Poor's and Moody's Investors Service have both warned that they may reduce Deutsche Telekom's credit ratings. Company executives seemed resigned to that prospect at a meeting with investment analysts and money managers in Hanover today.

"I don't think it's justified if you look at our operational business," said Ron Sommer, Deutsche Telekom's chief executive. "But ratings agencies don't always listen to me, and I don't always listen to ratings agencies."

Analysts estimate that a one-notch drop in the company's credit rating would increase its interest expense 80 million to 120 million euros ($71 million to $106 million).

That is not an extraordinary burden for the company, which had earnings before interest, taxes, depreciation and amortization of 15 billion euros ($13.2 billion) last year.

But the situation is not doing much for the stock price.

Deutsche Telekom's shares fell 1.7 percent today to close at 16.75 euros ($14.79) a share, about where it traded when it went public in November 1996, and less than one-sixth of its peak closing price of 103.56 euros in March 2000.

Source: http://www.nytimes.com/2002/03/20/business/worldbusiness/20TELE.html?todaysheadlines=&pagewanted=print