Telekom Serbia’s business has again recently come to the attention of the public due to accusations by competitors (primarily media N1 and Nova S, which operate within the United Group) that they want to expel this company from the market through restrictive agreements with Telenor. Before that, Telecom again attracted attention by acquiring Copernicus, whose ownership is connected with the SNS commissioner for Nis, Zvezdan Milovanovic. Without going further into this dispute, this is a good opportunity to take a closer look at Telecom’s business.
Different governments of Serbia have tried to privatize Telekom at least twice so far: in 2012 and 2015, but the sale did not take place because the offered price was significantly lower than the value expected by the Government. In a larger, or at least louder, part of society, these attempts were met with a knife, so we came to the paradoxical situation that the first attempt at privatization was carried out by the Democratic Party while the opposition Serbian Progressive Party was against it, and in 2015 the situation was reversed – privatization was supported by the SNS, while the DS opposed it. These failed privatizations turned into their antipode: in 2012 into nationalization, as Telecom bought 20% of the shares of a private Greek partner from its own funds and thus increased the state share, and after 2014 it was decided that Telecom would expand its business as a cable operator and buy a number of smaller companies in this domain across the country.
Operating income is stagnating, the company is over-indebted
We can learn a lot about the company’s operations from the financial reports that are submitted to APR. In doing so, consolidated company reports should be used, as Telekom Serbia’s owns several companies abroad (mobile companies in Republika Srpska and Montenegro) or in Serbia (eg Telus, a security company, and cable companies such as Supernova).
Revenues from business activities, according to the consolidated financial statements from 2014, increased by about 14 million dinars, or 12%, which seems to be a good result. However, when these amounts are adjusted for inflation of 10.2% in a given period, operating revenues actually stagnate. Revenues follow market trends: there has been a large decline in revenues from fixed telephony, with an increase in revenues from mobile telephony and multimedia. Operating expenses grew much faster, resulting in a large drop in the company’s profitability.
The largest increase in expenditures was recorded in the repayment of commitments for the purpose of investing – this is not necessarily bad, if the investment will bring with it new income in the future that will enable the repayment of commitments. In the period 2013-2018 the company invests approximately as much as the depreciation costs, and then enters a large investment cycle, primarily the acquisition of other smaller cable operators, although the investment was in all business segments, from mobile network to multimedia content production. Here we come to the problem: Telekom Serbia invests not only following its business strategy, but also the political ambitions of the ruling party, which both sets and controls the management. Only the desire for party control over access to the media can explain the situation in which Telecom significantly subscribed to Copernicus during the acquisition, and exactly as much as was necessary to sell TV O2 and Prva.
The financing of this investment cycle came primarily from external sources, through taking bank loans. As a result, the financial stability of the company was disturbed by a large increase in liabilities: in 2019, compared to 2017, liabilities increased as much as 2.5 times. And the biggest growth was recorded in short-term liabilities, which increased almost four times compared to 2017, which is very unfavorable for financing as it can lead to liquidity problems.
Such a large increase in Telekom Serbia’s liabilities had a major impact on the deterioration of financial indicators related to solvency and liquidity. Total liabilities through EBITDA (income before interest, depreciation and taxes) increased from 2.23 in 2017 to as much as 4.66 in 2019. At the same time, the rigorous liquidity ratio (receivables + cash / current liabilities) was reduced from the already low level of 0.74 in 2017 to only 0.51 in 2019.
High growth in operating expenses also reduced profitability indicators, which are measured by return on capital and return on operating assets. Both indicators are stable or show only a slight deterioration before the large investment cycle in 2018 and 2019, but then their downfall follows. With such a low return on assets or capital recorded in 2019, it would be more profitable for us to sell Telecom’s assets at the book price, and to deposit these funds in dinar savings in any bank, despite the fact that interest rates on deposits at an extremely low level, they are still higher than the yield offered by Telekom’s business, Talas reports.
