Bloomberg News

Deutsche Telekom’s Greek Debt Weighs on Europe Turnaround

October 12, 2011

(Updates with share trading in 14th paragraph.)

Oct. 12 (Bloomberg) -- Hellenic Telecommunications Organization SA has dropped 84 percent since Deutsche Telekom AG began buying shares in the Greek operator in 2008. The German owner will now accelerate a turnaround of the company to recoup some of the 4 billion euros ($5.5 billion) in investments.

Claudia Nemat, the McKinsey & Co. consultant who took over this month as Deutsche Telekom’s head of Europe, spent part of her first week in Athens, where she said in an interview she is “keen to develop the asset” because OTE, as the unit is known, is among the Bonn-based company’s most important operations.

The optimism contrasts with Chief Financial Officer Timotheus Hoettges’s comment in August that any further investment in Greece is uncertain as the debt crisis deepens. At stake is Deutsche Telekom’s largest business outside Germany and the U.S., where the company is fighting a lawsuit over the $39 billion sale of T-Mobile USA. In addition to slowing client losses and cutting wages in Greece, Nemat, 42, will need to push for more drastic measures such as asset sales, analysts say.

“Nobody is going to buy OTE right now with the overall economic environment in Greece so gloomy,” said Dimitri Kallianiotis, a London-based analyst at Citigroup Inc. who rates OTE “neutral.” “Deutsche Telekom will have to recognize its losses, but it wouldn’t be reasonable to let OTE go bust.”

Fixed-Line Losses

OTE, 40 percent owned by Deutsche Telekom, also sells phone services in Romania, Bulgaria and Albania. The Athens-based company had the worst mobile- and fixed-line customer losses among all divisions, ceding 1.2 million Greek clients in the 12 months through June as the government imposed austerity measures to stave off a default. Third-quarter revenue probably dropped 8.4 percent from a year earlier the average of two analyst estimates compiled by Bloomberg.

Writedowns in Greece and Romania contributed to a surprise loss at Deutsche Telekom in the final quarter of 2010.

Nemat may present a strategy for Greece and the other European countries in early 2012, said a person with knowledge of the matter who declined to be named as the plan isn’t public.

OTE, saddled with 4.1 billion euros ($5.6 billion) in net debt as of June 30, has pledged to reduce annual payroll cost at its Greek fixed-line unit by 300 million euros by 2015. This year, it sealed a deal to slash manager allowances and spending on company cars, and last month reached a preliminary agreement with a union on cutting weekly working hours to 35 hours from 40 in exchange for 160 million euros in savings through 2014.

Refinancing

Michael Tsamaz, who replaced Panagis Vourloumis as OTE’s CEO in November, has identified other areas for cost reduction, including abolishing permanent tenure, which 75 percent of the company’s fixed-line staff enjoy, and trimming liabilities of about 300 million euros that are pledged toward paying employees’ children.

OTE has about 3.3 billion euros of bonds and loans due by 2013. To refinance the debt, the company will need to sell assets such as its 20 percent stake in Telekom Srbija AD and the Hellas Sat satellite unit, said Citigroup’s Kallianiotis, who estimates the businesses may fetch 600 million euros.

“These are very interesting assets, especially the mobile business in Serbia,” said Nektarios Papagiannakopoulos, an analyst at Eurobank EFG Securities in Athens. “They can fill in the gaps in the capital structure in a worst-case scenario.”

Deutsche Telekom’s Hoettges said in August that his company would step in as a “last-resort” lender for OTE if it can’t access capital markets from 2013 onwards.

No Sells

An improved financial structure would help OTE compete as rivals consolidate in Greece. Vodafone Group Plc is discussing a merger of its local unit with Wind Hellas Telecommunications SA, combining the country’s second- and third-largest mobile operators and potentially adding competitive pressure for market leader Cosmote Mobile Telecommunications SA, owned by OTE.

OTE climbed as much as 2.5 percent and was up 1.3 percent to 3.19 euros at 10:43 a.m. in Athens trading, giving the company a market value of 1.6 billion euros. OTE was down 49 percent this year through yesterday, compared with a 57 percent decline in Greece’s benchmark ASE Index. Deutsche Telekom slipped 0.2 percent to 9.37 euros on the Frankfurt exchange.

Of the 19 analysts who cover OTE, 12 recommend buying, nine say hold, none advises selling. The average of the five share- price projections made this month is 5.94 euros.

“Ninety percent of the current share-price performance is correlated with the macro situation,” said Alexandre Iatrides, an analyst at Oddo & Cie in Paris, who has stopped adjusting his 8 euro price estimate as the economy lacks visibility. “When I look at the fundamentals outside the macroeconomic situation, the company is outperforming in Greece.”

European Union and International Monetary Fund officials yesterday indicated Greece will get an 8 billion-euro loan next month under a 110 billion-euro bailout, as European leaders move to reopen talks on a new package that may mean deeper writedowns on Greek debt.

‘Side Issues’

With the country set to enter a fourth year of recession in 2012 and consumers wary of further trims to their disposable income, Deutsche Telekom needs to boost cost-cutting efforts, Iatrides said. One way is to buy the remaining state shares in OTE in exchange for regulatory concessions on fiscal guarantees and freedom to fire people, he said.

After taking on an additional 10 percent holding in June to boost its stake to 40 percent, Deutsche Telekom still has the first right of refusal if the Greek government sells its remaining 10 percent stake. Nemat declined to say whether Deutsche Telekom would be interested in more OTE shares. Under the investment agreement with Greece, the German company already consolidates the unit and determines its CEO.

“There are a few side issues but we hope to solve these,” Nemat said last week as part of German government delegation to Athens to spur investments in Greece. “We’re very committed.”

--With assistance from Brian Parkin in Berlin. Editors: Kenneth Wong, Simon Thiel.

To contact the reporters on this story: Cornelius Rahn in Frankfurt at crahn2@bloomberg.net; Brian Parkin in Berlin at bparkin@bloomberg.net

To contact the editor responsible for this story: Kenneth Wong at kwong11@bloomberg.net


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