On November 15, Forthnet SA pub­lished its financial statements for the three months en-­ded September 30, 2010 and since then the share price has declined rapidly on increasing volumes.

Over the past seven trading sessions between the announcement of the results and the time of writing on Tuesday, Forthnet’s share price tumbled by 19.2 per cent from €0.52 to €0.42, hitting a low of €0.35 last Tuesday. Trading volumes in Forthnet’s equity over the past few months rarely surpassed the 200,000 level on a daily basis. However, over one million shares changed hands in each of the past four trading sessions. Last Tuesday 9.6 million shares were exchanged on the Athens stockmarket (equivalent to 6.2 per cent of the total issued share capital of the company) with one trade of 7.3 million shares at a price of €0.36 per share. This is an abnormally large amount of shares traded on a single day.

Although the results for the three months ended September 30, 2010 show a 9.4 per cent increase in revenue to €101.8 million, earnings before interest, tax, depreciation and amortisation (EBITDA) declined from €17.2 million to €16.7 million with the EBITDA margin reduced to 16.6 per cent compared to 18.4 per cent in the comparative period. The telecom business (mainly broadband services) contributed €10.5 million to the overall EBITDA figure while the PayTV business (Nova) accounted for the balance of €6.2 million. While the EBITDA from the telecoms segment showed a marked improvement (+47.5 per cent), the main area of concern lies with the PayTV business which registered a 36 per cent decline in EBITDA (from €9.7 million in Q3 09 to €6.2 million) with a worrying drop in the margin to 13.1 per cent from 20.7 per cent in the corresponding period last year.

The sharp decline in EBITDA was attributed to the higher content costs mainly related to the acquisition of sports rights. In recent months Forthnet announced that it extended its broadcast rights over the Euroleague Basketball matches and Greece’s soccer league until the end of the 2013/14 season. The Greek media had indicated that the new broadcast rights deal for the domestic soccer league amounted to €176 million.

Shortly after the publication of the Q3 results last week, one of the Greek analysts covering Forthnet downgraded the equity and also announced a sharp downward revision in the target price. The analyst cited that with margins at the PayTV unit unlikely to increase in the short-term, the Forthnet Group has become reliant on the broadband business to improve its financial performance. In view of the increased competition from the incumbent OTE following a change in the company’s top management, the analyst explains that this could lead to sustained pressure also on Forthnet’s margins from the broadband business.

In fact, this Greek investment management firm lowered its financial forecasts for Forthnet for the coming years. Moreover, the Greek analyst warns that Forthnet may have to take an impairment provision on the carrying value of goodwill which currently amounts to €286 million and is mainly composed of the goodwill from the acquisition of the PayTV business in 2008. According to the financial analyst this goodwill impairment could trigger debt covenants which in turn could lead to higher interest charges to be incurred by Forthnet.

Forthnet’s largest shareholder is Forgendo Ltd with an equity stake of 39.88 per cent, equivalent to 61.9 million shares. Forgendo is equally owned by Go plc and its major shareholder Emirates International Telecommunications. The total cost of Forgendo’s shareholding amounted to €225 million, equivalent to an average cost price of €3.64 per share. The recent sudden collapse in the share price reduced Forthnet’s market capitalisation to €65.3 million. This implies that the value of Forgendo’s shareholding measured by the market cap is now only €26 million.

Go invested over €110 million into Forthnet since 2008 and these recent developments are therefore of particular relevance to shareholders of Go plc. During Go’s AGM earlier this year, shareholders asked various questions on the performance of Forthnet highlighting the awareness among Go shareholders of the developments in Greece. The chairman of both Go and Forthnet Deepak Padmanabhan had clearly indicated that the intention is for Go and EIT to continue acquiring further shares in Forthnet jointly, as long as the share price of Forthnet remains attractive.

The last time an official announcement was announced by Forthnet that Forgendo acquired shares in the company was at the end of March 2010. Within three days between March 24 and 29, Forgendo had purchased a total of 4.3 million shares at an average price of €1.08 per share. Prior to that in 2009 Forgendo purchased a total of 3.88 million shares at an average price of €1.85 per share.

Go’s chairman explained during the AGM held in May 2010 that in line with Greek stockmarket rules, Forgendo can only acquire a maximum equivalent of shares representing a three per cent shareholding in Forthnet every six months. This equates to 4.66 million shares. As yet no further announcement has been made by Forthnet regarding further trades by Forgendo. However, given the large amount of shares that changed hands in recent days as the share price collapsed, an announcement revealing the identity of the buyer may be in the forthcoming.

Although the recent Greek economic woes could be partly to blame for the worrying trend in Forthnet’s share price, the fact that the Athens equity market index “only” declined by 33.7 per cent in 2010 while Forthnet’s equity tumbled by 65 per cent indicates that the downward trend in Forthnet’s share price may be attributable to increasing concerns on the financial performance of this telecoms company rather than the macro-economic problems in Greece. The fact that the share price is trading at a 78 per cent discount to the September 2010 net asset value per share of €1.93 also points in this direction. Normally telecom companies trade at a premium to book value.

Earlier on this year, the Greek media speculated about possible M&A activity surrounding Forthnet and another telecoms operator Hellas Online (Greece’s second largest alternative telecom operator which in 2009 formed a strategic alliance with Vodafone Greece). This led to a number of official announcements by Forthnet claiming that investors will be kept duly informed on any developments as they materialise. However Forthnet had also confirmed that it had held discussions with Hellas Online as part of Forthnet’s continuous search for companies with which it may co-operate. Although no further official announcements on the matter were issued since March 2010, on 16 September, during an interview with Reuters, the CEO of Hellas OnLine said that merger talks with Forthnet are near completion and the market should know soon whether the deal is on or not. Will the recent share price collapse of Forthnet affect any such M&A activity?

In view of the material developments at Forthnet in recent days, Go should provide its shareholders with an update on their large investment in the Greek company and how these latest developments could affect Go’s financial performance for 2010.

Rizzo, Farrugia & Co. (Stockbrokers) Ltd, “RFC”, is a member of the Malta Stock Exchange and licensed by the Malta Financial Services Authority. This report has been prepared in accordance with legal requirements. It has not been disclosed to the issuer/s herein mentioned before its publication. It is based on public information only and is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. The author and other relevant persons may not trade in the securities to which this report relates (other than executing unsolicited client orders) until such time as the recipients of this report have had a reasonable opportunity to act thereon. RFC, its directors, the author of this report, other employees or RFC on behalf of its clients, have holdings in the securities herein mentioned and may at any time make purchases and/or sales in them as principal or agent. Stock markets are volatile and subject to fluctuations which cannot be reasonably foreseen. Past performance is not necessarily indicative of future results. Neither RFC, nor any of its directors or employees accept any liability for any loss or damage arising out of the use of all or any part thereof and no representation or warranty is provided in respect of the reliability of the information contained in this report.

© 2010 Rizzo, Farrugia & Co. (Stockbrokers) Ltd. All rights reserved.

www.rizzofarrugia.com

Mr Rizzo is director of Rizzo, Farrugia & Co. (Stockbrokers) Ltd.

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