Comparative Financial Management Analysis of Telecom Italia with Other Telecommunication Operators in Europe

Abstract

Introduction The Telecom Industry has radically changed over the last years from a monopoly to a competitive market. A multitude of new technologies, liberalization and uncertainties about regulation are the key effects in this period of transition. This study analyses the economic and financial aspects of incumbent national operators in Europe through the construction of appropriate financial strategic maps for the year 1998. The Companies studied and analysed are the following: Telecom Italia (Italy), British Telecom (U. K.), France Telecom (France), Deutsche Telekom (Germany), KPN (Holland), Telefonica de Espana (Spain), Portugal Telecom (Portugal). Methodology Used Estimates, which are made in this study, are based on financial analysts' researches (JPMorgan, Deutsche Morgan Grenfell, ABN AMRO Hoare Govett). In order to outline the economic and financial standing of Telecom Italia and other European TLC operators, we firstly processed the balance sheet and, then, based on these, we have worked out the following strategic maps. Profitability map per market share; Financial autonomy map; Capital expenditure cover map; Current map; Liquidity map. Before analyzing these maps, it would be better to briefly describe, for each Company, contributions to revenue and cost formation, during the period 1996-2000, according to financial analysts' expectations. Revenue and Cost Expectations TELECOM ITALIA (TI) During the period 1996-2000, in spite of negative effects of tariff rebalancing, revenue increases are expected to be 8,8 per cent: we expect mobile telephony considerable growth (35 per cent), international acquisitions and alliances (26 per cent) and a higher penetration of new TLC services. Planned actions for reducing costs and raising productivity are: workforce reduction, deleveraging, reduction of depreciation charge (Italy was expected to be fully digitised by the end of 1998), business process reengineering, more frequent resource to outsourcing for those activities that are considered not strategic. BRITISH TELECOM (BT) Contributions to revenue growth are changing, during the period 1996-2000, expecting increases in mobile telephony and in new TLC services such as VOD (videoon-demand), home shopping, home banking, and so forth, and market share losses in local loop. As to cost side, BT is involved in substantial cuts in staffing levels, but, at the same time, it sustains high costs for expansion in Europe. FRANCE TELECOM (FT) As to revenue side, a soft increase in wireline segment is expected; because of the double effect of volume increases combined with highly monthly subscribers' fee and, on the other hand, the price cuts in international and long-distance calls due to tariff rebalancing. As to cost side, FT is estimated to have a strong cash flow generation and to be able to pay back debts reducing its gearing from 136 per cent ( 1996) to 41 per cent (2000). DEUTSCHE TELEKOM (DT) Contributions to revenue growth come from cellular and new TLC services. As to cost side, there is a number of ways for DT (the most indebted European TLC Company) to reduce its gearing of 152 per cent in 1997 and create higher earnings growth: a reduction in operating costs, principally through a reduction in staffing levels; a reduction in the projected level of capital expenditure (capex). Management has introduced a series of large technical changes to the network to reduce capex, including a reduction in the number of hierarchical networks, an extension to the number of switching nodes and further penetration of digital switch technology; a reduction in the projected level of investments. If this management is acted on all fronts, Deutsche Telekom could boost free cash flow in the coming years and net debt/net worth would fall to 38 per cent in 2001. Anyway, it seems difficult for the Company to be able to fully realize this management goal for the following reasons: union pressures could result in further staff cuts being curtailed; competitive pressures may cause capex to rise; investments could be higher, particularly if the regulatory position in Key markets enables Deutsche Telekom to invest more easily in future. …