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Franc Has to Drop to Avoid ‘Serious’ Harm, Swisscom CEO Says

The Swiss franc is still overvalued and needs to weaken further in order to prevent “serious” damage to Switzerland’s economy, the chief executive officer of Swisscom AG said.

The company, Switzerland’s largest phone operator, lowered its full-year targets in August because of the franc’s strength, which is sapping the value of euro-denominated sales from its Italian Fastweb SpA unit.

“It’s unimaginable that the Swiss franc stays at these levels over the next couple of years.” Carsten Schloter, CEO of Bern-based Swisscom, said in an interview yesterday. “It cannot be as it would seriously hurt the Swiss economy.”

Swisscom spent more than $5.5 billion to buy Milan-based broadband operator Fastweb in 2007 to offset slowing growth at home and now the weak euro is cutting revenue from that unit. The Swiss central bank last month imposed a ceiling of 1.20 francs versus the euro to aid exporters. The currency had reached a record high of 1.0075 versus the euro on Aug. 9 as investors sought a safe haven from the euro-area crisis.

Swisscom’s new sales forecast of 11.5 billion francs ($12.7 billion) assumes a franc exchange rate of 1.20 against the euro, compared with a previous prediction of at least 11.8 billion francs, based on an exchange rate of 1.30.

The franc weakened 0.1 percent to 1.2402 per euro as of 10:40 a.m. Zurich time. Swisscom rose 0.4 percent to 373 francs in Zurich, giving it a market value of 19.3 billion francs.

Asked about a potential sale of Fastweb, Schloter said that the company is “open to look at all the options available,” although the company has “no plan to step out of Italy” and wants to be a “long-term, committed investor.”

Crowded Market

Fastweb, the first company in the world to offer films and television-on-demand over the Web in 2001, may be attractive for competitors in a market crowded by at least five fixed-line and Internet operators including Vodafone Group Plc and Wind Telecomunicazioni SpA, said Berenberg Bank analyst Usman Ghazi.

“Swisscom’s main problem with Fastweb is that it bought it at the peak of the market and the investment hasn’t stood up to expectations,” Ghazi said. “If they sold a stake to another operator like Wind or Vodafone it would be good for Swisscom investors and better for Fastweb.”

Swisscom bought out a remaining stake in Fastweb this year and delisted the business, saying it wants to have greater flexibility. Founded in 1999, Fastweb built from scratch a fast fiber optics network, which is Europe’s widest reaching with about 2 million households.

Fastweb, which had 1.74 million broadband clients at the end of June, reported its only full-year profit for 2008 with net income of 1.1 million euros ($1.5 million).

Full-Year Loss

Fastweb should “be profitable in terms of net income” in some quarters this year “but not in the full year,” Schloter said. Its corporate client business has been “very good, with double-digit revenue growth” this year, he said, adding that the company still needs to improve its business with residential customers.

Schloter said Fastweb plans to invest about 1.5 billion euros in the next five years and that the company may be willing to spend more depending on necessary changes to the regulations.

The Italian authorities need to lower so-called termination fees for fixed-line operators as these companies pay 10 times more per minute than mobile companies for calls between fixed and mobile phones, he said.

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