Elektrim pays for ambitious telecom plans
The strain of building a telecom empire began to show at Elektrim last week, when the company reported a preliminary zl. 209.4 million ($52.35 million) loss for the first nine months of this year.
The company cited heavy capital expenditures, growing debt-servicing costs and exchange-rate fluctuations as the reason for the loss, the size of which was eight times more than what Elektrim had reported in the same period in 1998. The news caught some investors by surprise, and many piled out of the stock after the announcement Thursday morning, causing Elektrim shares to plunge 5.6% that day to close at zl. 33.5. The stock slid further on Friday, closing at zl. 30.2.
"The results were worse than expected," said Zbigniew Lapinski, an analyst with Deutsche Bank.
Analysts said that the dismal figures, however, where not the end of the bad news. Rafal Gebicki, head analyst at Raiffeisen Capital & Investment Polska, said that Elektrim's situation was likely to deteriorate further by the end of the year, and that a total 1999 loss could top zl. 340 million ($85 million).
The deep loss also had analysts predicting that the company would have to look for additional capital this year to continue funding investment-hungry companies it owns wholly or partially in the telecom sector, such as local telephone provider El-Net and mobile telephone provider Polska Telefonia Cyfrowa (Era GSM). The company needs as much as $1 billion in additional funds next year alone for its telecom business and $800 million by 2002, according to a prospectus for bonds the company filed with the U.S. Securities and Exchange Commission (SEC). The company also has pledged to invest $100 million into a recently acquired power plant, Patnow-Adamow-Konin (PAK).
"Elektrim needs tons of money, and badly," Lapinski said.
Losses this year have not helped in that effort, however. After the first six months of this year, Elektrim's own capital had shrunk from zl. 638 million ($159.5 million) to zl. 286.5 million ($71.6 million), Gebicki added.
The news of the deep loss caused some analysts, many of which were previously positive on the company, to downgrade the stock. ABN Amro even decided to reduce its recommendation from "buy" to "sell urgently." Deutsche maintained its "neutral" recommendation.
After hitting a high of zl. 57 at the end of June, Elektrim's shares have plunged 47% in recent months.
Almost a year ago, Elektrim began investing heavily in the telecom industry, trying to make the fast-growing sector a cornerstone of its business. In that aim, the company's subsidiary, El-Net, bid aggressively for the license to provide telecom service in Warsaw, offering $54.6 million for the license alone and another $150 million on buildout.
To finance some of its telecom activities, which include investments needed for Era, the company had hammered out an agreement with French telecom firm Vivendi to invest $615 million into a newly established telecom subsidiary, Elektrim Telekomunikacja.
That deal, however, hinged on Elektrim being able to take complete control of mobile telephone firm Era. The company has been thwarted in that effort by another major Era shareholder, Deutsche Telecom with 45%, and has only managed to increase its stake to 51%. According to the agreement with Vivendi, if Elektrim cannot transfer Era to its telecom subsidiary, the $615 million investment turns into an interest-bearing loan, which will further increase the company's indebtedness.
"It will be crucial how Vivendi reacts," Lapinski said.
At the end of nine months Elektrim had long-term debt of zl. 1.1 billion ($275 million), with short-term debt of zl. 1.64 billion ($410 million). The long-term figure does not include two key elements: the $615 million loan from Vivendi or a zl. 1.6 billion ($400 million) convertible bond issue completed this summer.
Funding that debt has been expensive. Even without figuring in the cost of Vivendi's loan or the bonds, Elektrim's financing costs jumped 120% in the first six months of the year to zl. 289 million ($72.25 million), according to the company's results. After nine months those costs stood at zl. 582 million ($145.5 million), a 181% increase from the same period last year.
Those costs attributed to the zl. 147.2 million ($36.8 million) loss Elektrim posted for the third quarter alone. But they were not the only factor. The weakening zloty also caused problems for Elektrim, as 80-90% of the company's debt is in dollar and deutsche-mark denominated loans, Lapinski said.
The red ink caused some analysts to predict doom and gloom for Elektrim. Raiffeisen's Gebicki said that the company could show a negative return on equity (ROE) next year that could force creditors to demand the return of their money and possibly push Elektrim to declare bankruptcy.
"According to our estimates, by the end of the year Elektrim's debt-to-equity ratio will be 2000%," Gebicki said.
By comparison, a widely considered acceptable debt-to-equity ratio for telecom firms is eight times.
The current situation calls for a quick solution, such as finding a deep-pocketed strategic investor, preferably Vivendi, analysts said. Without that, Elektrim will have difficulty finding more money through bonds or loans, said Michal Buczynski, analyst with Centrum Operacji Kapitalowych Banku Handlowego. But for that to happen, the situation with Era must be cleared up, he said.
