Forgendo, the joint vehicle between Go plc and its majority shareholder Emirates International Telecommunications (Malta), is aiming for majority control in Greek telecoms company Forthnet and will continue to build on its current 40.99 per cent stake when share prices are “right”, Go chief executive David Kay told The Times Business.
Forgendo dented Go’s financial results for the year ended December 31, 2010, by €28.3 million as Forthnet continued to brave Greece’s current economic environment. Despite company growth, the reduced profitability of its TV business left its mark on the books. Forthnet and Forgendo both recognised impairment losses as their investment was revalued to reflect the economic climate in Greece and its impact on the company’s outlook.
Go registered a €9.1 million pre-tax loss in 2010, almost three times the €3.2 million loss of the previous year, despite tripling its operating profit to €22.8 million and customer connections hitting a record 515,000. The results were greeted with disappointment by the investing community, particularly as shareholders’ dividends were cut by half.
Mr Kay emphasised the results had to be seen in the context of one-off charges in 2009 and the true perspective of Forgendo’s financial relation to Go. He also refuted suggestions Go had money to spend in Greece but not in its home market as he outlined the progress in the company’s €100 million, six-year investment in its infrastructure.
The chief executive pointed out last year’s results included immaterial one-time adjustments while Go’s 2009 financial performance was negatively impacted by material adjustments for voluntary retirement schemes, impairment loss on other receivables, provision for pensions and financial liabilities written back. The two sets of results did not make for a straightforward year-on-year comparison.
“Forthnet and Forgendo are minority interests from our point of view,” Mr Kay added. “They all come below the line although there were some big charges because Forthnet is a start-up in a growing market and a loss-making situation. We believe in the investment case and we believe we will see a return. We did not forecast the macroeconomic situation in Greece, neither did anybody else. Our expectations at the time of investment were higher than today.
“There is value in control of the company. We will continue to examine the situation, the share price. There is a premium associated with majority control and we would like to arrive at majority control at the right price. We will continue with the investment and we will continue to buy shares when the price is right. We are getting enhanced value. But it cannot be said that investment in Forthnet is taken away from Go.”
Forthnet holds a monopoly on its own TV package – like Go, it recently secured important sports rights exclusively – and its customer base counted 20 per cent of Greek households in the TV and broadband market, putting it in the number two position behind the incumbent provider. Mr Kay said Forthnet’s business was growing although the numbers had fallen short of the original expectations, and the company should be well-placed in the eventual upturn.
The players in Greece’s over-crowded telecoms sector were in the same boat – all were in a loss-making situation and were seeking to restructure and refinance for growth – and the market would inevitably see some degree of consolidation.
Go – which has just won World Finance’s prestigious Best Corporate Governance in Malta 2010 award – was also in business in a highly competitive market.
Many services had reached saturation point: There were now 125 mobile phones for every 100 people, the momentum of growth in broadband had slowed – although Go had now positioned itself as market leader – the company’s TV growth was tailing off, and fixed was stable. Much of the growth seen by Go’s services was related to the huge success of Home Pack, Go’s attractive quad-play bundle.
Customer numbers in the TV business and subscribers to sports content boosted by Go’s exclusive rights to the Barclays Premier League and the Italian Seria A have also been driven by Home Pack.
Mr Kay admits the “substantial” investment made in acquiring the football rights had exceeded expectations at the end of the last year but the total numbers had missed the original targets set at the time of the bid. The confusion caused by some calls for sports content sharing between providers, and heightened advertising campaigns for illegal content distribution through Dreambox, had damaged the sports programming’s potential subscriber numbers. The chief executive however maintains the investment brought added value not only to the programming line-up but also to Go as an operator.
“You could argue we are losing money (on the sports) but the benefits to the company’s reputation as a quality sports provider meant Go firmly established itself as a formidable player in the market,” Mr Kay said. “The boost to staff morale was enormous and Go now has probably the best studios and transmission facilities in Europe. It was an excellent decision to acquire the sports rights. As far as the illegal distribution of content through Dreambox is concerned, we are co-operating with all the authorities but there needs to be political will to enforce the law. We cannot police the nation and there is a reputational issue for Malta in this situation.”
The chief executive said the board’s recommendation to halve shareholders’ dividend stemmed from its policy for prudence and its careful examination of the business’ current situation.
He stressed Go’s shareholders – now numbering more than 10,000 – were an important constituent of the company. In weighing its options, the board had to consider the company’s future, its financiers, and its investment programme.
“It is a question of balance: do we invest more in new enterprises, do we invest in dividends, or in infrastructures? The directors felt that a dividend should be paid but not on the same scale as last year to exercise caution. We need to be prepared in case some of the programmes in the six-year investment plan come forward or payments are made earlier than we anticipate. We will examine our position every six months. We do not want to miss out on any investment opportunities, particularly in our own network.”
Meanwhile, efforts to right-size Go through voluntary retirement schemes in recent years had brought down its headcount to 1,053 full-time equivalents, closer to its long declared target of 1,000. But last month Go announced it would shed excess personnel through redundancies in a bid to ensure long-term competitiveness.
Mr Kay said personnel would be shed mainly from the fixed line business as the activity had shown the largest declines in revenue and profitability over the past five to 10 years.
“We have to reduce the costs of running the fixed network or we will show a loss on that side of the business,” he explained. “The number of fixed line customers is actually stable or growing. We are doing well, but the rates people prefer to pay are going down because of mobile substitution and competition.
“There is a disproportionate number of staff running the fixed activity because of enhanced technology and automation. We must make all our services profitable. Also the skill sets are changing: Not only do we need fewer people, we also need better qualified people.”
Mr Kay explained Year Two of Go’s ambitious investment programme could see an outlay of more than €20 million, building on the €16 million in 2010. Substantial amounts will continue to be directed at the mobile network, the core of which was replaced last year.
The radio access network and base stations will be completed by September so that Go will be able to unveil what Mr Kay described as the best network in the country by a long stretch.
Having leapfrogged technology, Go’s network will boast 4G capabilities and allow for easier upgrading than other local infrastructures.
On Tuesday Go announced it had named Minerva Networks as its platform for TV, video-on-demand, and ‘over-the-top’ TV services. Minerva’s carrier software will manage the delivery of internet protocol TV services to multiple devices including set-top boxes, computers and smartphones. A portfolio of new features incorporates network digital video recording, pausing and restarting live programmes, and catch-up TV. Mr Kay said the service should be ready for roll-out in the summer.
Meanwhile, significant progress will continue to be made on the nationwide project that will bring fibre optic ‘close to the home’. Substantial funds will also be channeled into further enhancing Go’s customer service levels to further boost its prime differentiator in the local market, Mr Kay said.