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| UK altnet update: what a poor show |
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| Wednesday, 04 August 2004 | |
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A
revival among UK alternative carriers earlier this year has proved
short-lived, leaving more questions than answers. One solution may be
consolidation... It's never easy when guarded optimism reverts to pessimism. This certainly seems to be the case when you compare the performance of the UK alternative network ('altnet') sector over the past three months with the three preceding months. In that time the optimistic talk of resurgence has been replaced with pessimistic predictions of another hard year ahead, as too many companies chase too little business. The positive sentiment was abruptly dispelled early last month when COLT issued a profits warning citing fierce competition in the lucrative corporate market. Outgoing chief executive, Steve Akin, said that since the publication of its first quarter results it had experienced tougher than expect trading conditions, with a slower than anticipated uptake of its data products and a disappointing performance of some of its higher margin voice products. This sent it shares plummeting. (For more detail on COLT and Akin, click here). Little more than a week elapsed before Thus weighed in with its first quarter results. It complained that its profits margins were under pressure because customers were shifting from higher margin narrowband connections to lower margin broadband. Even though the company reported strong revenue growth and cash flow for the first quarter, the market reacted by lopping off more than 20% of its share price to arrive at its lowest point for a year. Bill Allen, chief executive of Thus, was dumbfounded. He described the market's reaction as "bizarre" and pointed out that the company's core business had performed well, with revenue growth for the first quarter exceeding that for the corresponding quarter the previous year. At the results presentation, Thus also announced that it is to sell its loss-making call centre business to Response Handling Ltd for a reported UK£4mn. The business, which employs nearly 1,000 people, made a pre-tax loss of UK£1mn on a turnover of nearly UK£22mn. Thus said the business was not core to its strategy of focussing on its key growth areas of data, telecom and IP services. It said that it was also reviewing the options for its loss making telemarketing business. On a more positive note, the company said that it was to invest UK£1.5mn into higher margin local loop unbundling and IP services and maintained its guidance that it expected to move into profit by the end of the 2004/5 financial year. Challenging Continuing the dismal trend for the altnets, Cable and Wireless announced a disappointing set of first quarter results. It echoed the sentiments of COLT and Thus saying that trading conditions were "very challenging". The UK's second largest telecom company reported a 9% year-on-year fall in group revenue. Its UK revenues, which account for about half the group's revenue, fell by four percent calling into question the effectiveness of the turnaround strategy put in place by the firm's relatively new chief executive, Francesco Ciao. Its overseas businesses were also hit by increasing competition in Japan and the Caribbean. This sent it share price plunging to its lowest level for more than a year, at 108.5p. All this seemed a far cry from when the company announced its full year results a few months earlier. Then it revealed that it was restoring its dividend it had suspended the previous year and had halted three years of declining revenues in its UK business. COLT then rounded off the proceedings to a thoroughly miserable month with its half year results which confirmed its earlier warns of tough times to come. But as if to highlight the fickle nature of the market its share actually rose, the bad news having already been factored in by analysts. Kingston Communications provided the only bright note amongst all the gloom. In a recent trading statement, the Hull-based telco appeared not to be affected by the malaise of its competitors. It revealed that its performance was very much in line with market expectations. For market punch drunk with bad news this was enough to send its shares higher too. Groundhog day However, you could be forgiven for thinking that this Groundhog Day 2 and that we were on the verge of another collapse in the telecom market but you'd be wrong. The telecom market is in a much healthier state financially than it was when the telecom bubble burst in 2001. Then the altnets were left in a perilous state, having expanded rapidly at great cost. For the past few years they have licked their wounds, cut costs and repaired their balance sheets to emerge leaner, meaner and fitter. So much so investors thought it was safe to dip their toes back into the market and share prices responded accordingly. Cable and Wireless, for example, was reportedly the best performing blue chip in 2003. However, now analysts are arguing that financial discipline and cost cutting are not enough, especially as BT has prospered in the business telecom market while its competitors have been suffering from financial uncertainty. Not surprisingly observers are predicting that the current set-backs could be the spur to the much-predicted industry-wide consolidation. Pick any one from four. There has been speculation on almost any permutation: COLT with Energis; COLT with Cable and Wireless; Kingston with Thus - and each has a perfectly logical, well reasoned argument. Cable and Wireless is seen to be by many as the most likely consolidator, sitting as it does on a cash pile of UK£1.45bn. But the latest rumour links Energis with COLT, the argument being is that there is very little overlap in terms of customers and there would be efficiency gains from putting together COLT's access network with Energis' backbone network. Not surprisingly the companies themselves are keeping quiet and respond to such talk with anodyne comments as "we do not comment on rumour and speculation", or in the case of Cable and Wireless, "we continue to screen opportunities to expand our footprint", which is a posh way of not saying the former but still saying nothing. Jon Moggridge |
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