Bloomberg News

Deutsche Telekom’s Greek Ambitions End With Cash Crunch

June 26, 2012

Deutsche Telekom Southeast Europe Ambitions End With Cash Crunch

The headquarters of Hellenic Telecommunications Organization SA, also known as OTE, stand in Athens, Greece. The Greek phone company said yesterday it is exploring the sale of its Bulgarian assets, including phone company Globul and electronic goods retailer Germanos Telecom Bulgaria. Photographer: Kostas Tsironis/Bloomberg

Deutsche Telekom AG (DTE) four years ago bought a stake in Greece’s largest phone company, promising investors growth in southeast Europe to make up for slowing sales in Germany. That offensive has now turned into a retreat.

Hellenic Telecommunications SA (HTO), also known as OTE, is selling assets in the region to stay afloat as the Greek economy is mired in its fifth year of recession with unemployment at 21 percent. After the disposal of a 20 percent stake in Serbia’s former telecommunications monopoly this year, OTE is now looking for a buyer for its Bulgarian business.

Proceeds from the sale will help bridge a refinancing shortfall of 800 million euros ($1 billion) to 900 million euros, said a person familiar with the matter, who asked not to be named because the plan isn’t public. Deutsche Telekom’s European business, once hailed by Chief Executive OfficerRene Obermann as the main growth driver, shrank by 10 percent last year as the region’s debt crisis curbed phone-service spending.

“They never really stood a chance,” said Fairesearch GmbH’s Heinz Steffen, the top-ranked Deutsche Telekom analyst according to Bloomberg data. “The business is still there, but the growth fantasy is gone. As an investor, you have to ask: Where did my money go?”

Obligations

Deutsche Telekom has spent a total of 4 billion euros on a 40 percent stake in OTE since 2008. As OTE’s stock slumped, Deutsche Telekom has recorded writedowns of 2.6 billion euros on the asset. The Bonn-based company determines OTE’s CEO and consolidates OTE’s earnings as part of a shareholder agreement with the Greek state, which owns 10 percent.

OTE shares have fallen about 90 percent in Athens since Deutsche Telekom began acquiring the stock. They climbed 3.4 percent to 1.85 euros in Athens today, bringing their decline this year to 36 percent and valuing the operator at 907 million euros. That compares with OTE’s 3.4 billion euros of underlying net debt at the end of March. Deutsche Telekom gained 1.2 percent to 8.38 euros in Frankfurt.

The Greek phone company said yesterday it is exploring the sale of its Bulgarian assets, including phone company Globul and electronic goods retailer Germanos Telecom Bulgaria.

“A potential sale of these assets would drastically reduce OTE’s future financial obligations, while allowing the group to strengthen its presence in its remaining strategic markets,” OTE said in an e-mailed statement.

Bailout Plan

Globul is Bulgaria’s second-largest wireless service provider with 4.3 million subscribers at end of last year, behind Telekom Austria AG (TKA)’s M-Tel unit. OTE also owns assets in Romania and Albania.

Turkcell Iletisim Hizmetleri AS (TCELL) said yesterday it has made no decision on bidding for Globul after the Capital newspaper reported that the Turkish carrier may be among potential bidders.

International Growth

Antonis Samaras was sworn in last week as Greece’s prime minister, the country’s fourth since November, to tackle the nation’s debt crisis.

Greece won a second bailout this year from the EU and the IMF, taking the total rescue package to 240 billion euros. Under the country’s bailout program, Greece has to reduce its budget deficit to 7.3 percent of gross domestic product this year from 9.3 percent in 2011, and cut its primary deficit, which excludes interest payments, to 1 percent from 2.4 percent.

The refinancing of OTE is secured until 2013 and the division will evaluate further asset sales to generate cash, Deutsche Telekom Chief Financial Officer Timotheus Hoettges said last month.

Deutsche Telekom’s retreat from some European markets marks a shift from its earlier strategy.

After acquiring a stake in OTE in 2008, Obermann told investors that he intended to continue growing internationally.

Retreat

“In 2000 we made less than 20 percent of our total revenue abroad,” Obermann said at the company’s 2008 annual shareholder meeting in Cologne. “In a few years the portion we generate outside of Germany could account for two thirds or more.”

As recently as last year, Deutsche Telekom’s then-interim head of Europe, Roland Mahler, said the carrier was looking to make acquisitions to consolidate holdings in market leaders and combine fixed and mobile networks. No acquisitions were made, and peers including France Telecom SA (FTE) and Telefonica SA (TEF) have turned to selling some European operations to repay debt and secure dividend payments.

Everything Everywhere

The decline in European sales last year included the impact of the separation of the U.K. business into the Everything Everywhere venture with France Telecom completed in 2010, Deutsche Telekom said. Excluding that, revenue from the region dropped 5.8 percent.

Elpida Trizi, a Deutsche Telekom spokeswoman, declined to comment.

Deutsche Telekom tried to sell its T-Mobile USA unit to AT&T Inc. for $39 billion last year before burying the deal in the face of regulatory opposition. To raise cash, the German phone company is also evaluating options for selling its 50 percent stake in Everything Everywhere, people with knowledge of the matter said in February.

OTE, founded in 1949, has a 445 million-euro loan and a 312 million-euro revolving credit facility due in September, according to its website. It also has a fully-drawn 900 million- euro revolving credit and 1.24 billion euros in bonds due in 2013. OTE reported earnings before interest, taxes, depreciation and amortization of about 1.7 billion euros for last year.

Slim Prowls

Asked about the future of OTE, Deutsche Telekom’s Hoettges said in May that “in the end, the Greeks will always need a phone provider.”

The former national phone monopoly makes almost 70 percent of its revenue from its Greek home market.

The sovereign debt crisis prompted asset values to drop across Europe, inviting investors such as Mexico’s Carlos Slim, whose America Movil SAB (AMX:US) has acquired stakes in Dutch phone company Royal KPN NV and Telekom Austria. Still, Deutsche Telekom is unlikely to resume its prowl for acquisitions, said Andres Bolumburu, an analyst at Banco de Sabadell in Madrid.

“People thought the sector was going to be resilient, but everybody who invested has been surprised by the impact of the economic slowdown,” he said. “Investors really don’t want to see any crazy new moves now. It’s a different atmosphere than it was back then.”

To contact the reporter on this story: Cornelius Rahn in Frankfurt at crahn2@bloomberg.net

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


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