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Wednesday, November 15, 2006

Telekom Austria: Fantastic Footprint

I have always been impressed by the discipline of the expansion strategy of Telekom Austria. They have basically focussed upon the rapidly growing economies of South East Europe where mobile penetration has typically been low. Additionally, they have been creative in overcoming difficulties in Bulgaria and more importantly have been unwilling to overpay when the prices get too steep as with the auction of Mobi 63 in Serbia. This expansion strategy is now starting to pay dividends to the shareholders.


In the 3Q results, Operating Income was up from €264.1m to €281.6m – a healthy if unspectacular growth of 6.6%. Due to a combination of the growth in underlying earnings and the ongoing share buyback programme Earnings Per Share increased 16.6% to €0.45 from €0.38. All of the growth in the 3Q results came from recent expansion into Bulgaria, Slovenia & Croatia with each market showing improvements. In addition, the revenues at the core Austrian wireline operations remained pretty stable due to increased wholesale voice traffic delivered to Eastern Europe. Profits in the Wireline business in Austria were substantially down (€199.4m vs €218.8m) due to increased labour costs, mainly through one-off redundancies and share option payments – an eclectic mix if there ever was one.

The wireless business in Austria is also ex-growth with revenues slightly down to €435.8m vs €441.8m. However, EBITDA is significantly down (6.3%) with €162.4m vs €173.3m. I am quite surprised at this given that the market consolidated with the purchase of tele.ring by T-Mobile. The market situation is still unstable with the fourth operator, 3, having a tiny share of the overall market and I would guess that further consolidation in Austria is on the cards.

Bulgarian EBITDA is up to €97.2m from €80m, Croatian EBITDA up to €77.6 from €63.9, Slovenia up to €12.3m from €8.7m. Although tiny, Liechtenstein is even up although insignificant in the overall mix.

It looks as if the recent purchase of a start-up licence in Serbia is progressing ahead at full speed and it will be fascinating to watch over the next few years comparing the relative performance between Telenor and Telekom Austria in this crucial Balkan market. Telenor outbid Telekom Austria in the auction for the second operator, Mobi 63, paying €1.5bn. Telekom Austria paid €320m for the third licence and is forecasting spending €250m of capital expenditure to roll-out national coverage with positive cashflow occurring in 2009. No indication was given of the expected start-up losses.

The next focus for Telekom Austria is the much delayed auction of the Telekom Srpske licence in Bosnia & Herzegovina which is due to be completed before year end. The Telekom Austrian shareholders will be hoping that the reason for the delay is that Telekom Austria is the only bidder. I do not see Telekom Austria’s appetite being satisfied there either. Both Montenegro (T-Mobile & Telenor) and Macedonia (T-Mobile & Cosmote) would be relatively inexpensive to expand the footprint further, although will not make a material difference to the overall group. Before anyone thinks of expansion into Kosovo, I would imagine that some sort of political solution to the Serbian break away is necessary.