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Belgacom: A watching brief

October 2, 2006
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(Total Telecom Via Thomson Dialog NewsEdge) One door down from the entrance to Belgacoms head office is an airy, high-ceilinged glass cylinder, housing a Belgacom shop. Enticements for passers-by include three months of free IPTV.

Television is the central pillar of Belgacoms domestic strategy. Like all of Europes incumbent operators, its voice revenues are declining and mobile growth is slowing down. Belgacom lost 59,000 lines in the second quarter of 2006compared to 26,000 in the first quarterwhile mobile revenues fell 1.5% year on year to 1.07 billion in the first six months.



Belgacom has done some international deals: in March 2005 it combined its international wholesale operations with those of Swisscom. But the domestic market remains its main focus.

In August, Belgacom bought Vodafones 25% stake in Proximus for 2 billion, giving it full control of the Belgian mobile operator, raising expectations it would develop a fixed-mobile convergence (FMC) strategy. But like Telecom Italia, Belgiums incumbent stresses that there is more than one way to offer service bundles.

The market expects some synergies out of the Proximus deal, says William Mosseray, chief strategy officer. That doesnt mean we have to put everything together. Right now we are a fixed company and a mobile company, and I dont know if that will change. The jury is still out [on fixed-mobile convergence], although we might not want to wait until the jury decides. It might be too late.

That did not stop it highlighting FMC trends in a statement in June, while outlining its strategy for its newly acquired national ICT company, Telindus. The corporate ICT market is in full transition phase, showing a strong convergence (voice/data, fixed/mobile), a strong trend towards outsourcing and a commoditization of ICT, the company said.

Telindus was finally captured in January for an initial price of some 600 million following a bidding war against France Telecom. Acquiring Telindus was an extremely important move for bolstering enterprise ICT services nationally, says Mosseray. But he insists it is not part of a bigger international services strategy.

Although Belgacom will support customers which outsource back-office operations in eastern Europe, for example, it will do so by leasing facilities and employing staff according to customer needs.

There are trends to outsource in eastern European countries. We may develop that according to the needs of our large customers. But it will be project based; we are not Equant.

Benoit Denis, consultant, ICT Practices, at Frost and Sullivan, suggests the carrier is too cautious with emerging markets. But he adds: They dont have the financial means to have an international strategy.

Raising the stakes

In fact, private equity money has raised the stakes for some possible acquisitions, in some cases forcing Belgacom to rein in its strategy. We dont want to do crazy things and pay crazy multiples, Mosseray says. Maybe the bubble is not as large as the Internet bubble, but there is one. I dont want to be in the centre when it explodes.

In August the company announced it would sell its 5.8% stake in French operator Neuf Cegetel to SFR for 187 million because it could not gain a majority share. It doesnt mean we put a cross through France or other countries, adds Mosseray.

The fact that Belgacom50% owned by the state which has a 53.14% voting rightis not full master of its destiny was emphasised last month when the Belgian prime minister urged it to seek partnerships.

The Belgian state doesnt want a private equity buyout, suggests Goldman Sachs. Its analysts say Belgacom has an equity market capitalisation of 9.7 billion; that compares to a valuation of 19 billion for Netherlands operator KPN.

The Belgian state may be keen to explore their options for Belgacom in the event of any change in the law to allow the state to sell their controlling interest, say the analysts. We believe it is possible that the Belgian state may be looking for options and partners that would allow Belgacom to become larger to avoid it being perceived as a target for private equity interests.

That law wont change before Belgian elections in 2007, but Belgacom recognises consolidation could affect it.

Its the strategic challenge of a mid-sized operator in Western Europe. We have no reason to say were in big trouble and should do something, says Mosseray. But the world around us is also moving. Does it make sense to combine forces? NGN investments might be a triggering factor.

Currently, there are no plans for fibre-to-the-home network investments. We dont believe today that FTTH makes sense, says Mosseray.

In the meantime it is continuing with other domestic investments, particularly with costly IPTV deployment. Belgacom said in its first-quarter financial report that TV operations would have an estimated negative EBITDA impact of about 3040 million in 2006, with ARPU at around 13.

The service, which is included in the carriers fixed-line business, had a negative EBITDA contribution of 11 million in Q1, and generated revenue of 2 million. Net ARPU was 11.9, and capex for the TV service was up to 19 million.

Mosseray expects IPTV to be unprofitable for two more years. But some think the digital TV service will be a cash drain until at least 2015.

Obviously its not going to generate margins of 30%, 40%, 50%, [like those] of traditional voice, says Mosseray. And there are challenges. Acquiring the right content is difficult, he concedes.

By the end of June Belgacom had 74,000 subscribers to its TV service, and is targeting 100,000 users by the end of the year.

IPTV is the right way for Belgacom to go, argues Benoit at Frost and Sullivan. Belgium is a small, densely populated country, making it cheaper per inhabitant to develop the network than in many other European countries, he says.

Currently, Belgacom is upgrading the Proximus 3G network with HSDPA technology to provide broadband mobile services by the end of the year.

Copyright 2006 Terrapinn Ltd


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