Wednesday, December 23, 2009

Happy holidays, farewell noughties, and onward and upward in 2010

Well, as Santa packs his sleigh, one thing is painfully clear: I have been a bad blogger and will only be receiving lumps of coal this year. My New Year's resolution is to post and Tweet more frequently in 2010. It promises to be an interesting, if challenging, new decade, and I look forward to being involved in new projects and adventures.

Given that the past two years have brought me little besides serial frustrations and disappointments on both personal and professional fronts, I can't say that I am sad to see the end of this first decade of the millennium. However, that would be to overlook all the wondrous developments in our beloved telecom which make the world in December 2009 look almost unrecognisable to the time traveller from ten years ago: the inexorable global rise of mobile; ubiquitous WiFi; grid computing; Linux in the consumer sphere; the proliferation of consumer broadband; peer-to-peer architectures; social media, user-generated content, and mash-ups; online gaming and immersive worlds; access-independent voice; the iPhone and apps; the iPlayer/Hulu; YouTube; the Cloud phenomenon; Google Earth; search and recommendation engines which actually work...

I could go on, and no doubt I'm missing many and overselling others. However, those of you who remember 2000 will, if you're honest, recognize that this list represents some genuinely huge changes to the world we inhabited when we celebrated the Millennium, and also that many of them were unexpected, or have happened either faster or on a broader scale than many could have anticipated at the time. Yet, what underlies their development is the technical, regulatory, and commercial framework which allowed these developments to take shape. In other words, the investment in development, policy, infrastructure and business models which enabled the fairly humble and primitive platform quaintly called "The Information Superhighway" in 1999 was critical to engendering all of the innovation we have seen in the decade since.

Only the most visionary at the time could have had a genuinely clear idea of how things would look in 2009, but the steps were taken nevertheless, possibly in some cases as a blind stab in the dark at some sort of nebulous opportunity which might develop as a result. We now find ourselves at the threshold of a new decade and a new range of unforeseen possibilities to be facilitated through further investment, and my guess is that the degree of transformation we will acknowledge at this time in 2019 may make the past decade look tame by comparison. If you find this line of thinking interesting, and also find yourself overdosing on family togetherness over the holidays, you might like to sneak away into a quiet corner and have a read of this recently-published paper which I co-wrote with my man Taylor Reynolds of the OECD. I look forward to your feedback, and hopefully to discussing and debating in the new year. Meanwhile, I am off to the States to see family and friends and (gulp) play a live show...

Until then, thanks for reading, and I'd like to wish you all the best during the holidays and a fulfilling and prosperous new year.

Thursday, December 10, 2009

Of sausage and budgets

There's an old saying to the effect that there are two things you never want to see being made: UK budgets and Vienna sausage. Yesterday, most eyes in the UK were on the renaming of the City of London as Darlingrad, a brave new world wherein the conventional laws of mathematics don't apply, e.g., a 50% tax on an estimated GBP6bn bonus pool raises only GBP500m.

Meanwhile, another debacle was occurring somewhat further east, as Telekom Austria yesterday issued a tersely-worded recalibration of market expectations for 2010, wherein, despite revenue outlook being in line with consensus, EBITDA was forecast to be 11% below consensus, capex 14% higher, and as a result, operating free cash flow 25% lower. No additional color was offered by way of explanation for the variance, and the market understandably did a 14% tap dance on the share price.

Some friends of mine on the sell-side had a few hours before unfortunately published a buy note on the company. It is common practice for analysts to run their forecasts and note past a company prior to publication, just to ensure there are no factual errors or misrepresentations. Whether that occurred in this case or not, I don't know, but I assume it did, and if so, the fact that the company was on the verge of publishing material information and said nothing is not the sort of thing which endears companies to analysts.

In fact, in this case, the analysts in question, rather than trying to explain things away and goose their numbers to fit their recommendation, have done the right thing, and terminated coverage. They write:
"We spoke with TA after its profit warning yesterday. In sum we understand the following: A few months ago it was quite clear that the four year budget drawn in late 2008 would have to be revised down. But TA goes through the detailed process of drawing up a four year budget only once every 12 months (at the end of each calendar year) - yesterday's announcement follows the conclusion of this process for 2009.

From this we deduce that until this detailed process is completed, TA is largely unable to correct/reset consensus expectations even if trading conditions look set to be very different from the assumptions behind the last communicated business plan (in this case, the one drawn up in late 2008).

We apologise unreservedly for not thinking that this was at all possible. Because clearly it is possible, we believe that we cannot research TA's investment case with any reasonable degree of confidence. We therefore terminate coverage."
This is hard stuff to have to write when you're in their position, and if anything, I think they're being overly polite. I am of the humble opinion that if companies become aware of a material change to outlook over the coming 12 months (I consider EBITDA variation of 11% to be material), there is every incentive (and indeed, in some markets, a regulatory requirement) to issue a formal statement and get the pain over with in a way which preserves some degree of trust and respect from the analyst and investor base. Such a move would also avoid having to surface revelations such as the fact that the four year budget is reviewed once a year, three weeks before Christmas. Investors don't want nasty short-term shocks, but they also don't want persistent nagging suspicions that there is a culture of complacency in such a rapidly changing industry landscape, or more frankly, that visibility is too poor to make credible four-year budgets.

Tuesday, December 08, 2009

Walk like an Egyptian

A little over a month ago, I had an interesting discussion with someone involved in the subordinated debt of WIND Hellas. This is a situation I have followed very closely all year, though I was only interested in the senior parts of the capital structure, for reasons which are now obvious, principally because I have always expected the outcome we have recently seen.

As I explained to them, my thesis was pretty straightforward. The company's capital structure was over-leveraged, and the EBITDA multiple of the company through the senior debt alone was in some cases at a premium to European incumbents, despite having a critical liquidity crisis, compromised competitive position, and Greek macro risk. The implication was that the subordinated debt had little if any value, and Mr. Sawiris' original EUR500m equity check was lying at the bottom of the Aegean. The only way to salvage any equity value would be to align interests with the senior lenders and push out the guys in the middle - the subordinated debt holders. No room for concessions or niceties.

Their response was that they couldn't understand why Mr. Sawiris would risk his reputation and access to capital markets through a UK pre-pack insolvency which would wipe out EUR960m and $275m of subordinated debt. Surely he wouldn't be able to come back to the markets any time soon. I told them I wasn't convinced that he need be too worried about either reputation or access - a lot of cash is waiting on the sidelines, and the market has a chronically short memory.

Sure enough, less than a month since the filing, a sister entity from the Weather complex, Wind Acquisition Holdings Finance SA, comes to market with a EUR500m bond offering. Not only is it serious money, it is also reportedly structured as a PIK note for the first four years. We haven't seen any PIK issues since things started to go south in 2007, and many of the outstanding PIK deals from the Good Old Days have been treated like red-headed stepchildren over the past year. So, having just crushed a boatload of subordinated debt in November, we're now looking at a large, deeply subordinated debt issue which is effectively free money for the first four years. Far from being locked out of the markets, Mr. Sawiris will defiantly get this one away, and I am now prepared to officially elevate him to rock legend status. You may not agree with his tactics, but he certainly gets an A+ for audacity.

Surely investors angered by the WIND Hellas outcome would be inclined to boycott, but I hear price talk of a 12% coupon, and the market is so relentlessly thirsty for yield that I'm pretty confident that when the books close it will either be significantly up-sized or very oversubscribed. I don't know the Egyptian gesture equating to the two-fingered salute, but this will probably do nicely.