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Business

Rosier Days Ahead for Europe's Telecoms

Contending with heavy losses and massive job cuts, it’s been a rough couple of years for Europe’s telecom giants. But now there may be a little light at what must have seemed a very long tunnel for industry managers.

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Europe's telecoms have been on hold for the past few years.


Europe’s former state-run telecommunications monopolists were once the toast of the region’s equity markets. Rapid growth, flashy technology and buoyant share prices all joined to make telcos such as Deutsche Telekom, France Telecom, Spain’s Telefonica and Finland’s Sonera some of the hottest investments around. Deutsche Telekom’s initial public offering in 1996 has even frequently been credited with single-handedly reinvigorating Germany’s equity culture.

But those salad days are long since gone. Over the past few years Europe’s telecom operators have stumbled their way through a minefield of slumping profits, tanking share prices and painful restructuring. Ron Sommer, long Deutsche Telekom’s golden boy CEO, was forced to clean out his desk in 2002, the same year the company posted a record loss of €24.6 billion ($27.6 billion).

Though it’s probably of little solace to Sommer, other telcos fared little better. The 2002 earnings of France Telecom, Vodafone, KPN from the Netherlands and Telefonica were all also drenched in red. Only until very recently have industry analysts begun to see the first signs that things are starting to slowly improve for Europe’s beleaguered giants.

Many of the industry’s leaders have put their books back in the black by tackling their once mounting debt and putting the unrealistic expectations placed on third-generation wireless services behind them.

Telekom Chef Kai-Uwe Ricke

Deutsche Telekom's Kai-Uwe Ricke

Telekom’s new boss Kai-Uwe Ricke, in the saddle since November 2002, has seen profits rebound this year, and he has continued to slash at the company’s near €50-billion pile of debt.

Relative rebound

That’s all helped DT’s share price rebound from an all-time low of €8.55 last autumn to €13.50 on Friday. But it would be hard to find someone who would describe current conditions as rosy given the fact that Telekom’s stock in spring 2000 cost nearly €104 per share.

"Every time when the price recovers a respectable amount, some more stuff rolls onto the market," said Theo Kitz, an analyst for Bankhaus Merck, Finck & Co. He said the stock will remain under pressure as major stakeholders continue to unload DT shares over the next few years.

The shares of other former monopolists have traced a similar rollercoaster path. But equity market woes aside, Europe’s telcos will also have to continue with their painful restructuring. Foremost on the list are massive job cuts across the industry.

Spain’s Telefonica, for example, is expected to shed 15,000 from its total 45,000 positions by the end of 2007 and Deutsche Telekom, which is Europe’s largest phone company, plans to eliminate a whopping 50,000 jobs by 2005.

"Unlike analog technology, the digital network will only require about a tenth of the people," said Frank Rothauge, an analyst for the Frankfurt bank Sal.Oppenheim.

Still, it’s painful measures like slashing their payrolls that experts such as Rothauge say will help the industry get its bearings again. And that means he and others are already placing their bets who might lead the way into the next boom.

"We expect that Telefonica will be the growth leader in Europe from 2005 onwards," said Rothauge.

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