For two years, the state, the owner of the largest telecommunications operator, has been listening to criticism of investments in the purchase of cable operators. Business results and the latest management decisions again give rise to the question of whether the purchase of several local operators paid off.
Falling profits, rising debt – a pledge for the future?
Telekom Serbia, the largest telecommunications operator in Serbia, announced that it would pay dividends to shareholders from the profit from 2019 in the amount of slightly more than 17.5 million euros by the end of November. It is interesting that at the shareholders’ assembly held in July, it was decided to transfer the profit of around 29.1 million euros from the financial report for 2019 to the undistributed profit, ie to keep the profit. This was in line with earlier announcements that dividends would not be paid, as they had not been paid last year, until the company’s debt was reduced.
What led the Supervisory Board to make a decision on the payment of dividends three months later remains unclear, especially since it is a relatively small amount of funds, 2.58 dinars gross per share, which will not mean much to individual shareholders or the state as the majority owner. Nenad Gujanicic from the brokerage house Momentum Securities points out that with such contradictory decisions, the company’s credibility on a world stock exchange would be shaken.
“If they concluded a few months ago that they should not divide the dividend due to high debt, what has changed now? On world stock exchanges, such companies would not have the confidence of investors. Especially if we remember how the company, at the beginning of the fiscal consolidation, made the decision to pay a dividend to the budget in January, so it got into debt because of that,” Gujanicic reminds.
The multimedia business flourished
Unless the owner of the company, the state, did not want to shut the mouths of critics who indicated that Telecom would not pay a dividend due to large investments in the purchase of cable operators in the previous two years. Exactly those purchases quite stirred up the public, and above all the purchase of the cable operator Copernicus Technologies for as much as 195 million euros at the end of 2018. This was followed by acquisitions of a large number of other operators, primarily Radius Vector for 108 million euros, as well as other small local operators.
The very choice of investments in the distribution of media content, as well as their production, is obviously a good choice, and for that conclusion, it is enough to look at Telecom’s revenues last year. The group’s business revenues increased by 68.3 million euros, of which multimedia recorded a growth of 46.6 million euros, or even 70 percent of the revenue growth came from this area, which is of course a consequence of these acquisitions. On the other hand, Telecom’s core business, fixed and mobile telephony are stagnating at best, although they still make up the bulk of revenue. Revenues from mobile telephony increased by 1.6 percent, while those with fixed telephony decreased, which is a long-term trend.
However, what could be a problem is the price of these acquisitions, ie how much they have contributed to Telecom’s revenues and profits. That contribution is not visible for now, because the net profit of the national operator last year amounted to only 20 million euros, according to the company’s annual report, and it was reduced by as much as 77 percent compared to the previous year.
Acquisitions increased debt
So, acquisitions have not yet contributed to the profit, but they have greatly increased the debt. The group’s credit obligations jumped to 1.19 billion euros in 2019. Just two years ago (2017), before the investment cycle, they amounted to 475 million euros. At the end of last year, the net debt (when the cash on the accounts is deducted from the liabilities) amounted to 1.12 billion euros.
A month ago, Telekom borrowed 200 million euros by issuing corporate bonds that were bought by commercial banks, but immediately afterwards, a good part of that debt was bought from them by the National Bank of Serbia. It is difficult to say whether this increased the company’s debt, because it is possible that these funds will be used to repay some other debts.
According to Goran Radosavljevic, a professor at FEFA, the basic issue in the analysis of Telecom is not the choice of investments, but the price of acquisitions.
“The investments were well chosen, considering that only that part of Telekom’s business is seriously growing, but the companies that were bought were overpaid three to five times. I think more could have been done with less money. Then there is the purchase of B92 and Prva for 200 million euros by the owner of Copernicus, which is also overpaid. For example, that Antenna (previous owner of B92 and TV Prva) offered 15 million euros for Copernicus in 2008. There is no chance that the value of that company has increased tenfold in 10 years,” Radosavljevic estimates.
Another problem that arises from this is the high level of debt. Radosavljevic warns of the amount, but also of the dynamics, because in two years it has jumped from 400 to 1.2 billion euros of debt.
On the positive side, Telekom borrowed at a time of record low interest rates, and it is also affected by a stable exchange rate. Nenad Gujanicic from the brokerage house Momentum Securities points out that the telecommunications business is liquid and there will be no problems with debt repayment in the near future.
“But if you paid 300-400 million euros for the acquisitions, the effect should be seen in the results. Telecom has a history of overpriced takeovers. In 2006, they took over Telekom Republike Srpske and that investment has not yet paid off. There is also the takeover of Dunav Bank, not to mention Copernicus now,” reminds Gujanicic, warning that the time has passed when Telecoms were golden cocoons with a huge increase in income.
On the other hand, Telecom points out that the change of strategies was necessary, which is obvious from the revenue structure, but they are also optimistic about the future. Vladimir Lucic, coordinator for internet and multimedia of the Telekom Serbia group, said in an interview that he expects that in 2023 EBITDA will exceed 700 million euros, and that the value of the company will jump to four billion euros.
This means doubling both the company’s earnings and values in just three years.
According to some EBITDA-based value estimates, telecommunications companies in the growing economies to which Serbia also belongs are valued at 6.2 annual EBITDA, while cable operators are valued at 8.4 annual EBITDA. With an EBITDA of 410 million euros, the value of Telecom would be around three billion euros, but with a debt of 1.2 billion euros. In fact, that means that the current value of Telecom is where it was in 2015, and even in 2011, when about a billion euros were offered for 51% of the shares of this company.
In business, and especially in telecommunications, anything is possible, so we can only hope that the value of Telecom will really double so quickly.
Creating a duopoly
According to the RATEL report for the second quarter of 2020, Telecom is still the leader on the mobile telephony market with a 44.1 percent share, ahead of Telenor with 31 and VIP with 24.3 percent. However, this market is characterized by a decrease in the number of active users. For example, in the third quarter of 2019, there were 8.59 million of them, and in the second quarter of 2020, 8.1 million. However, telephone traffic increased from 4.4 to as much as 5.4 billion minutes. The area of mobile internet recorded a significant growth of as much as 20 percent from the beginning of the year to the end of June, and in the period from April to June, 109.5 million gigabytes were transferred. When it comes to broadband fixed internet, the number of subscribers has increased slightly. Telecom is also the leader with 40.3 percent of the market, ahead of SBB with 32.7 percent. However, this is not the real picture because the third and fourth Copericus and Radius are the vector with over eight percent of the market, which are now part of Telecom.
In the distribution of media content, a duopoly was practically formed. SBB has a 47.5 percent stake. On the other hand, Telecom has 28.4 percent, then Copernicus 6.9 percent, Radius Vector four percent, and there are several other small local cable operators that Telecom has merged in the previous two years.
This also raises the question of the state of competition in this sector and what it means for users that they can actually choose only between two providers, Nova Ekonomija reports.
