Magyar Telekom to Stem Cash Flow Drop in 2014, CEO Says

Magyar Telekom Nyrt., Hungary’s former phone monopoly, may see a slide in cash flow bottom out next year, helping the company move ahead with acquisitions, Chief Executive Officer Christopher Mattheisen said.

The fixed-line and mobile carrier, controlled by Deutsche Telekom AG, is on the lookout to buy domestic cable and IT companies and would consider acquiring a stake in Telekom Slovenije DD when it comes up for sale, Mattheisen said. Magyar Telekom will also vie in a state tender for mobile frequencies and review its dividend level once it knows more of the sale’s details, he said.

“The free cash flow decline will bottom out in 2014, assuming big-ticket items such as the mobile frequency sale takes place this year or next,” Mattheisen said in an interview yesterday.

The Budapest-based company is struggling to reverse a decline in profitability as special taxes in Hungary and weak economic performance in central and eastern Europe take a toll on profits.

Its shares were little changed at 294 forint at 2:25 p.m. in Budapest, keeping this year’s fall of 21.6 percent stable after hitting a record low of 287 forint on Oct. 14. That compares with a 30 percent drop in the share price of Telekomunikacja Polska SA and a 0.2 percent increase in Czech peer Telefonica Czech Republic AS’s stock price this year.

Telekom Slovenije

Slovenia approved the sale of state-owned assets to prop up its budget in June. It is picking advisers for the sale of 72.7 percent in Telekom Slovenije after it canceled a previous attempt to sell it in March, 2008. Mattheisen said Magyar Telekom would still be interested.

“Acquisition abroad is still a possibility but there’s not much out there on the shelves,” he said. “Most of the basic business reasons why it would have made sense for us to buy Telekom Slovenije in 2007 still hold true now.”

Hungary is also seeking to sell all of its state-owned mobile frequencies. The media authority, known as Nmhh, will start tender procedures this year, Nmhh Deputy Director Gabor Matrai said on Sept. 6.

Magyar Telekom can make use of “any or all” of the frequencies that may come on sale, and the company’s dividend after the 2013 business year hinges on the tender’s timing and scope, Mattheisen said.

“A decision of whether we reduce the dividend or suspend it will have to be made, but this is still ahead of us” he said. “Buying frequencies would mean a bigger hit in the short run from a cash-flow perspective, but in the longer run it generates value for the operator and the customers.”

Ebitda Outlook

The tender comes after a Budapest court annulled results last year of a previous sale, citing “serious procedural law infringements.” The regulator awarded a fourth mobile license in January 2012 to a group of state-owned companies and Magyar Telekom, along with local units of Vodafone Plc and Telenor ASA, appealed the result.

Magyar Telekom “had no indication” whether the state-owned mobile company intended to take part in the new frequency sales, Mattheisen said, adding that he’d be surprised if a new commercial competitor tried to enter the market.

Magyar Telekom sees earnings before interest, taxes, depreciation and amortization, an indicator closely watched by analysts and investors, dropping 6 percent to 8 percent next year compared with 2012. That will follow a 9 percent to 12 percent decline this year, and it sees Ebitda once again exceeding this year’s level by 2017, according to management guidance published on Sept. 30.

Dividend Policy

The company will maintain its dividend policy based on a targeted net debt-to-capital ratio of between 30 percent and 40 percent, it said in September. The 41.8 percent debt ratio recorded at the end of June is a seasonal spike, Mattheisen said, declining to say where it may stand at the year-end.

“I don’t want to make any irreversible structural changes to my business” to reduce the debt ratio, he said.

Magyar Telekom’s second-quarter Ebitda rose 0.3 percent to 49.6 billion forint ($229 million) from a year earlier and net income climbed an annual 14 percent to 12.2 billion forint.

Sales will grow by a 2 percent compound annual growth rate by 2017 with almost a fifth of revenues coming from non-telecommunications activities including energy sales and insurance by then, Mattheisen said.

Energy sales to households won’t be unprofitable even after a second-round of government-mandated utility price cuts come into effect on Nov. 1 after recently modified legislation provides a level-playing-field for all service providers on energy market, Mattheisen said.

“In many ways we will look quite different by 2017, we will be much more an integrated company that offers a multi-play package by default and 3 out of 4 of our clients will be a multi-play customer by then,” he said.

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