By Infonetics Research’s Stéphane Téral.
Here is some good news to weather the current deluge of gloomy headlines about Europe, the EU and the euro.
I know saying that this mess is having a minimal impact on telecoms sounds bullish, but looking at financial data and facts, the reality really does not look that bad.
Our debt and cash flow analysis indicates, similar to a recent Moody’s report, that Europe’s Big Five – Deutsche Telekom, Vodafone, France Télécom, Telecom Italia and Telefónica – ranked by cash and available long-term committed bank facilities, won’t need to tap into capital markets for the next 12 months.
This is principally because they: are the stronger cash generators in the region; benefit from large cash balances and large unused and committed bank back-up facilities; and each have more than €10 billion of cash as well as long-term committed bank facilities.
Telefónica has the least cash at around €11.5 billion, which is still twice as much as the next and sixth company in this ranking: Portugal Telecom.
Deutsche Telekom is one of Europe’s top five debt issuers in the telecom industry, owns 40 percent of Greek incumbent OTE, and will stand behind as a lender of last resort if needed. This outstanding solid financial footing is a direct result of a decade-long tactical cash management.
Remember the great telecom crash that started in March 2000 and first pushed BT and KPN close to bankruptcy before Deutsche Telekom and France Télécom got a close call after each piling up €70 billion in debt?
They all cleaned up their mess in a timely fashion by implementing drastic measures ranging from divestiture to stringent cash management involving low capital intensities (ie, capital expenditure-to-revenue ratios) ranging between eight percent and 12 percent compared to 15-22 percent during the heyday.
As a result, the steep disinvestment cycle that resulted from the 2000 capital expenditure bubble bottomed out in 2004.
The telecoms industry became cyclical as a result of deregulation that took place in the 1990s. Historical data suggests that when an industry is deregulated, this kind of cyclical transformation always occurs.
In 2005, a telecom investment cycle started and reached its plateau in 2008. It was characterized by low sustainable capital intensities ranging from eight percent at Vodafone Europe to 12 percent at France Télécom.
As a result of such financial discipline, free cash flow ran high, rewarding shareholders with better dividends than even the banks were able to generate.
In 2009, a short-lived disinvestment cycle started and quickly ended in 2010, which is consistent with investment cycle theory, without much of an impact from the financial crisis. In fact, the telecom industry proved to be resilient in hard-hit economies in the Baltics and Eastern Europe.
Now 2011 marks the first year of a new investment cycle that we believe will plateau in 2014, again according to investment cycle theory as well as current conditions, which, looking at all the European headlines, are cloudy at best.
The banks are the nerve centre of the world’s economy, as are the currencies, and it is fundamental to keep the money flowing in the form of commercial papers so that every business can continue to run its daily operations.
But if credit freezes and there is a liquidity crunch, Europe’s Big Five telecom operators can tap in their coffers to weather the storm.
In the meantime, demand for mobile data communications remains unabated and after sweating assets for the past five years, a large majority of European mobile operators have already embarked this year on significant network upgrades and modernisation programmes (eg, Everything Everywhere’s Refresh).
Europe’s Big Five are no exception and during Q3 2011 earnings calls, their respective CEOs reaffirmed their three-year network investment plans.
All in all, we believe telecom fundamentals remain intact and with all that cash on hand, European service providers will stay the course and maintain their projects throughout the storm.
After all, history tells us that there is no better time to invest than during a crisis, providing cash is available to put to work.
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