Georg Zudwill's pretzel cost at least $4,000. That's how much the retired data processor from Duisburg figures he has lost since buying Deutsche Telekom shares in 1998. But like hundreds of other investors, he could at least tuck into the free food, including piles of soft pretzels, that the German company served at its annual shareholders meeting in Cologne on May 20. "That's something, anyway," said Zudwill, 77, between bites.
Germans call such free eats the Wurst dividend. But will they soon have something more substantial to sink their teeth into? Maybe. After three years of rampant wealth destruction, Europe's sickest telecommunications companies are showing signs of renewed health. Deutsche Telekom posted a profit in the first quarter for the first time in two years, after a $29 billion loss in 2002. At France Télécom, a 7.3% increase in revenues from a year earlier boosted cash flow by 60% (the company does not report profits on a quarterly basis). Meanwhile, the Netherlands' Royal KPN beat analysts' expectations for the first quarter, and brokerage WestLB Panmure predicts net earnings of $2.4 billion for all of 2003 after two years of losses.
The telcos' biggest risk -- their staggering debt burden -- is receding as a new crop of managers slashes spending and sells off noncore assets such as cable-TV networks, foreign holdings, and phone-book subsidiaries. "The debt story for European telcos is over," declares WestLB's Peter Wirtz [chart]. An amazing statement, considering that two years ago, KPN was in danger of bankruptcy, and a year ago, the heads of the French and German telcos were about to be shown the door. "This will be the year of the turnaround," Deutsche Telekom's new CEO Kai-Uwe Ricke told shareholders.
But it's also clear that the telcos still face plenty of challenges. One big worry is that much of the improvement in debt has come at the expense of investment. France Télécom cut capital spending by $410 million in the first quarter. Telco execs insist they're still investing in growth by, for example, pumping money into next-generation mobile networks. But outsiders have their doubts. "They could be neglecting important investment," frets Lars Labryga, a lawyer who tracks Deutsche Telekom for Germany's Society for the Protection of Small Shareholders.
In the long term, Europe's former telecom monopolies may face an even bigger problem: an overreliance on fixed-line networks and traditional voice calling. Those businesses supplied 47.3% of Deutsche Telekom's sales and nearly 60% of operating profit in the first quarter. But both profit and sales are falling. New technologies, such as broadband Internet access, do not offer the same generous margins.
So where will growth come from? Deutsche Telekom shareholders certainly want to know. At the annual meeting, Ricke promised those gathered at a sports arena in Cologne that he would make DT the most innovative, customer-friendly company going. He even vowed to spend time working at a Deutsche Telekom retail outlet. A nice gesture, but Ricke has so far stuck mainly to the course established by his predecessor, Ron Sommer. For instance, he has resisted calls to roll back Sommer's international expansion.
Investors are coming to grips with a disappointing new reality. Instead of fast-growing tech stars, telcos from now on may well be more like utilities, producing steady but unexciting returns. "You have to be realistic about the future," says Julian Hewett, chief analyst at Ovum Ltd., a telecommunications-research company in London. While that's great for widows-and-orphans shareholders, it hardly engenders the kinds of multiples most investors were hoping for. Margins on mobile services are still good, but practically everybody in Europe already has a mobile phone. And companies have slowed the rollout of costly third-generation mobile networks.
There are positive signs: France Télécom's shares -- which at one point were 97% off their 2000 peak -- have tripled in value since CEO Thierry Breton took over in October. The company has easily sold more than $10 billion in bonds and $17 billion in new shares since December. If the big telco stocks continue to gain ground, it will do a lot to restore confidence in Europe's battered bourses. "We investors live on hope," says Lothar Schneider, a retiree from Leverkusen, Germany, who owns several hundred Deutsche Telekom shares. Just be sure not to let your hopes run away with you.
By Jack Ewing in Cologne and Andy Reinhardt in Paris