Greece's Economic Plight Plays Out at Former Telecom Monopoly

Hellenic Telecommunications Organization SA, the former Greek telephone monopoly, held its shareholder meeting on an Athens sidewalk last year as unions protested Deutsche Telekom AG’s plan to buy more shares.

The company plans to ask investors at this year’s annual gathering on June 16 to approve a loan from Deutsche Telekom. Hellenic Telecom, known as OTE, is counting on the German company just as Greece relied last month on politicians from Berlin to lead a 110 billion-euro ($136 billion) rescue package.

“OTE is a mirror of the Greek problem,” said Boris Boehm, who oversees 1 billion euros at Aramea Asset Management AG in Hamburg and holds Deutsche Telekom shares and Greek government bonds. “Is there a lack of credibility? Yes. Is there a challenging economic situation? Yes. Is it a default? No.”

With 14,600 workers, OTE ranks among Greece’s biggest corporate employers and encapsulates what the International Monetary Fund and investors say is wrong with the country and its economy. The company’s net income fell 33 percent in 2009 and its stock slumped 42 percent during the past 12 months, compared with the 12 percent advance of the Standard & Poor’s Europe 350 Telecom Services Index in the same period.

OTE’s fixed-line unit spends almost three times more on wages as a proportion of revenue than does Portugal Telecom SGPS SA, which operates in a country similar in size to Greece. That’s partly because 76 percent of OTE’s fixed-line staff is classified as civil servants, meaning they can’t be fired.

Lost Monopoly

Union and political influence over OTE, which lost its monopoly in 2001, has guided decisions such as expanding in countries as far away as Yemen while the local Greek network needed funds for infrastructure enhancements to such items as fiber-optic lines.

“OTE is an example of how things don’t work in Greece,” said John Karidis, an analyst at MF Global Securities in London. “OTE’s cash-generating ability will either go towards keeping a few thousand redundant employees still employed or redirected towards giving the millions of Greeks a fiber-optic network.”

Deutsche Telekom has spent 3.8 billion euros since 2008 to acquire 30 percent of OTE, seeking to tap growth in the Greek company’s Romanian, Bulgarian and Albanian markets. In the same period, the government reduced its holding to 20 percent from 28 percent, while retaining veto power over corporate decisions such as who serves as chief executive officer.

Deutsche Telekom CEO Rene Obermann said in March the company was “ready to talk” about the purchase of an additional 10 percent from the Greek government.

Papandreou’s Dilemma

The government of Prime Minister George Papandreou isn’t ready to sell more OTE shares. A 10 percent stake is worth 332 million euros at current prices, or about half what the previous government received last June for 5 percent of the company, and would raise at best 382 million euros.

OTE fell last week to the lowest level since shares began trading in 1996, lowering the value of Deutsche Telekom’s holding to about 1 billion euros.

“Deutsche is trying to increase its grip on OTE very slowly, but now with the stress they can act more as the big brother,” said Jankees Ruizeveld, a senior credit analyst at Rotterdam-based Robeco Asset Management, which oversees about 135 billion euros for clients. “Every time Deutsche Telekom tried to do something with OTE, the next day there were people trying to block the entrance, and it’s clear that this is less the case right now.”

Wooing Unions

Papandreou and his Pasok party wooed unions last September during the election campaign in part by promising to renegotiate the Greek state’s shareholder agreement with Deutsche Telekom. Greece must have “strategic control” and a substantive role in decision-making at OTE, Papandreou said.

“We’re not guided by the logic of a sell-off at low prices,” Finance MinisterGeorge Papaconstantinou said yesterday. “The government will maintain the existing strategic stake and discuss the future of the company with the new management of OTE arising from the general assembly.”

This year, Papandreou has been forced to cut wages and pensions and increase taxes as part of pledges to the European Union and IMF to cut the national deficit to less than 3 percent of gross domestic product in 2014 from 13.6 percent last year.

OTE said May 12 that sales probably will fall this year because the austerity measures will include a higher tax bill for the company just as businesses and consumers cut spending.

“We are doing everything we can, not as fast or as well as we want, because of the obstacles,” CEO Panagis Vourloumis, 73, said in a May 17 interview in Athens, a block from where anti- government protests left three people dead last month. “One thing is for sure, our after-tax profit will go down.”

Feeling Pressure

Under EU and IMF pressure, the government began talks this week with unions and employers to relax labor rules and moderate wage growth.

OTE’s plan to reduce costs by eliminating as many as 2,000 jobs is on hold as the government bans early retirement programs that hurt the already ailing state-run pension system.

Standard & Poor’s cut the company’s long-term credit rating on May 27 to BBB- from BBB. That’s one notch above junk and the BB+ rating of the Greek state.

“OTE is undergoing strong regulatory and competitive pressures, which Greece’s macroeconomic woes are magnifying,” S&P analyst Leandro De Torres Zabala said in a statement. OTE had total debt of 5.4 billion euros at the end of March, of which 2.2 billion euros is repayable next year.

Buy or Hold

Nine of the 25 analysts who cover OTE have a “buy” rating on the company’s stock and the rest have “hold” recommendations, according to data compiled by Bloomberg. By contrast, 15 of 31 analysts are telling clients to purchase shares of Portugal Telecom.

Payroll costs at OTE’s Greek fixed-line division accounted for 33 percent of the unit’s sales last year. At Portugal Telecom, the fixed-line workforce totaled 6,430 last year, almost half of Hellenic Telecom’s 11,369, and payroll costs represented 12 percent of sales.

With an average age of 45 and 17 years of service, OTE workers are bussed to and from work at the company’s expense.

“Deutsche Telekom isn’t active in Greece to solve the very deep-rooted problems,” Aramea’s Boehm said. “I’m more optimistic that things can be solved, not on a short-term basis but longer term. A commitment to Greece is the right decision.”

To contact the reporter on this story: Maria Petrakis in Athens at mpetrakis@bloomberg.net.

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