British Telecom on the Mend

British Telecom (BT) (NYSE: BTY) today announced results for a year in which it was forced to give up its ambitions of becoming a global operator and refocus its efforts on its home market (see BT Results: Debt Halved).

The results suggest that BT is making headway on improving its balance sheet. It’s managed to halve its net debt in the year ending March 31, 2002, to £13.7 billion (about US$20 billion) – still a staggering figure, but one that’s helped the U.K. operator reduce net interest payments to £1.41 billion ($2.05 billion) for the year.

BT’s EBITDA (earnings before interest, tax, depreciation, and amortization) was £5.7 billion ($8.3 billion), down a little on the previous year. However, this gives a net debt-to-EBITDA ratio of 2.4 -- a key figure that might help BT regain a single ‘A’ debt rating that would further lower its interest payments.

This suggests that BT is in much better health than -- or at least isn’t as sick as -- its major counterparts in mainland Europe, Germany’s Deutsche Telekom AG (NYSE: DT) and France Telecom SA.

Deutsche Telekom has a truly enormous net debt of €67 billion ($61 billion) and a net debt-to-EBITDA ratio of 4.6. Its saving grace is a “reasonably credible debt reduction plan,” according to analysts at Nomura Bank in London. Deutsche Telekom has been able to hang fire on selling its cable assets and the planned IPO of its mobile subsidiary because it has plenty of other disposables up its sleeve, according to Nomura.

Though DT has been tight-lipped on its actual plans, it has recently been rumored that it will sell off all of its Southeast Asian interests. These include a 25 percent stake in PT Satelindo of Malaysia, a 16 percent holding in TRI Celcom of Malaysia, and a 22.1 percent stake in Globe Telecom of the Philippines.

France Telecom had an equally huge net debt of €63.1 billion ($57.5 billion) at the end of 2001, giving it a net debt-to-EBITDA ratio of 5.1. The operator has said that in the worst case, its debt could still be €50 billion ($45.6 billion) at the end of 2005. Nomura thinks this is optimistic and that France Telecom’s net debt could rise to €70 billion ($63.8 billion) by that time.

It’s widely expected that the French government, which is still a major shareholder of France Telecom, will end up having to bail the operator out by supporting a rights issue (an offer to existing shareholders to buy stock at a set price) some time after the mid-June elections.

The main issue for all of the European incumbents is that their domestic fixed line revenues -- the dependable source of income that enables the telcos to raise capital from the banks -- have become less dependable. The operators find themselves in the position of needing to invest heavily in growth businesses (particularly mobile) if they are to secure their futures, while their means of financing that investment declines.

This state of affairs is illustrated by the big black hole in BT’s balance sheet created by its corporate fixed-line business, BT Ignite. It’s not expected to reach EBITDA breakeven before March next year. The loss at the unit in BT's fourth quarter was £353 million ($514 million), up from £309 million ($450 million) in the same period a year ago.

— Ouida Taaffe, special to Light Reading
http://www.lightreading.com