Bloomberg News

Magyar Telekom Says Tax Measures, Forint Cut Profit

March 12, 2007

Magyar Telekom Nyrt., Hungary's former phone monopoly, said government austerity measures, a strengthening forint and accounting changes for an investment will keep profit from growing this year.

The government action alone, which includes a higher corporate income tax and measures that cut disposable income, will lower revenue by ``several billion forint,'' Chief Executive officer Christopher Mattheisen told reporters in Budapest today. (1 billion forint = $5.3 million)

Magyar Telekom, the Budapest-based unit of Germany's Deutsche Telekom AG, is battling lower revenue from its fixed- line business and eroding profitability on mobile phones due to competition from operators like Vodafone Group Plc. The company may expand to keep its profit growing, Mattheisen said.

``A big challenge for the company is to expand in other directions,'' he said. ``Anything organically or non-organically we can do to accelerate that kind of growth is in our interest. Data, broadband, content media, systems integration, IT -- a lot of those areas fulfill those conditions.''

Magyar Telekom shares rose 0.5 percent to 935 forint today, valuing the company at 975 billion forint.

The forint's gains against the euros are cutting the value of profit from Magyar Telekom's units in Montenegro and Macedonia when converted to the Hungarian currency. At the same time, accounting changes to its Tetra emergency radio network means lower revenue from that project this year than in 2006, Mattheisen said.

Past Expansion

Profit last year was boosted by earnings from Hungarian software developer KFKI Zrt., which Magyar Telekom bought in June, and by local information technology services company Dataplex Kft., purchased in late 2005. Magyar Telekom also bought IWIW, a Budapest-based social networking Web site.

Outside Hungary, Magyar Telekom started offering fixed-line services in Romania and Bulgaria last year and has plans to expand in Ukraine. It already has majority stakes in phone companies in Macedonia and Montenegro.

Deutsche Telekom CEO Rene Obermann on March 1 said he will look to spur growth with mobile-phone takeovers, reversing the policies of his predecessor Kai-Uwe Ricke. Mattheisen, who took Magyar Telekom over in December, said there will be similarities in the two companies' strategies.

``Our focus, although it's not identical to DT, is very similar,'' he said. ``We are also looking for growth, we are also looking for synergies. The general new strategic focus that they have announced doesn't mean a whole lot of change for us.''

`Flying Time'

Magyar Telekom will continue to look for acquisition targets in Hungary and southeast Europe, he said, without saying which companies or countries the company will target.

``There's a certain physical reach that we can address,'' Mattheisen said. ``Anything within two or three hours of flying time can be included in theory. From then on you have to start eliminating things based on regulatory environment, growth prospects.''

Mattheisen declined to say if the company will change its dividend policy after paying 70 forint per share the past three years. Acquisitions can probably be financed from Magyar Telekom's cash flow, he said.

``We do have a pretty healthy balance sheet, healthy enough to finance even the ideal acquisition that we can make,'' Mattheisen said. ``Our balance sheet can help us either with a pure cash acquisition or if any debt needs to be taken out to do that, the balance sheet we have can handle that as well.''

The company's also working on a cost-cutting program, which will start yielding results next year, Mattheisen said.

To contact the reporter on this story: Balazs Penz in Budapest bpenz@bloomberg.net

To contact the editor responsible for this story: Chris Kirkham at ckirkham@bloomberg.net.


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