Fastweb writedown weighs heavily on Swisscom

Swisscom CEO Carsten Schloter says he is convinced of Fastweb’s merit Keystone

Swisscom has vowed to stand by Italian broadband provider Fastweb despite booking a €1.3 billion (SFr1.59 billion) writedown on the subsidiary.

Fastweb still has some good cards in its hand despite the worsening economic conditions in Italy and the service’s poor coverage among private sector customers, according to experts.

Swisscom’s track record in foreign investments is not so good: in 2004 Switzerland’s biggest telecom company sold its stake in the German Debitel, losing more than SFr3 billion. Its ventures in Hungary, Malaysia and India also ended up being costly.

In 2005, the Swiss government – which holds a majority stake in Swisscom – ordered the country’s dominant telecommunications provider to cease buying overseas companies.

The decision led to the resignation of former chief executive Jens Alder. But his successor, Carsten Schloter, was able to break the shackles with the acquisition of Fastweb in 2007.
 
On Wednesday of last week it appeared that Fastweb had gone the same way as previous overseas ventures. Swisscom said that it would be hit by a €1.3 billion impairment charge on the broadband operator, for which it paid €4.6 billion (SFr7.6 billion at the time).
 
Swisscom said it expected this to translate into a SFr1.2 billion fall in group net profit this year – a blow given that it posted a net profit of SFr1.8 billion in 2010.

Better prospects

But Matthias Finger, a telecommunications expert at Lausanne’s Federal Institute of Technology, believes that Fastweb still has a better chance of succeeding, despite the writedown and an investigation by Italian police last year that implicated the subsidiary in a tax evasion scam.

“It is tempting to look at Fastweb as yet another overseas investment disaster after the problems Swisscom experienced in countries such as Malaysia and India,” Finger told swissinfo.ch.

“Swisscom made the mistake of paying far too much for Fastweb than they should have done, but it still represents a good strategic move.”

Fastweb’s strength in fibre optic broadband network infrastructure coupled with its number two position among corporate customers in Italy gives the company excellent growth prospects, Finger explained.

“For this reason I would not advise Swisscom to sell Fastweb,” Finger added.

Economic gloom

Swissom’s overinflated valuation of Fastweb has been exposed by deteriorating economic conditions in Italy that have seen many customers willing to switch providers, and an increase in the number of unpaid bills.

One of Fastweb’s  main customers is the Italian government, which has been forced to dramatically cut costs in the face of spiraling state debts.

In addition, price competition has increased following the entry of new operators into the market.

“High sovereign debt, weak economic growth, increasing unemployment and political uncertainty are risk factors which have impaired future growth and thus the company’s value,” Swisscom said in a statement.
 
It will be necessary to make a cost reduction of €120 million over the next two years, although Schloter did not comment on possible job losses. It is thought there will be no impact on Swiss jobs.

Not all bad

The news has not come as a total surprise. Other telecom companies active in Italy have also suffered depreciations, such as Telecom Italia (-€3.2 billion) and Vodafone (-€0.9 billion).
 

Fastweb, which last year saw its sales rise 50 per cent to €1.9 billion, has posted a drop in revenue of 7.8 per cent to €1.3 billion in the first nine months of this year.
 
Fastweb does still have some good points, according to local observers. Fastweb is much smaller than its competitors: Telecom Italia, Vodafone and Wind.
 
And the decision taken by Italy’s telecommunication authority a few weeks ago to drastically reduce mobile termination fees (fees mobile phone companies charge other operators for calls on their networks) should have positive repercussions for the Swisscom subsidiary.

Fastweb

The company was founded by Italian entrepreneur Silvio Scaglia and financier Francesco Micheli in 1999.

In 2007 Swisscom bought an 82% stake in Fastweb, investing a total of €4.6 billion.

In the past few years, Fastweb has become Italy’s leader in the field of fibre optic communications, particularly for internet connections and fixed line telephones. It also offers a television and mobile phone service.

It is second in the commercial users market and third in the broadband market in Italy.

However, Italian prosecutors suspect Fastweb of being part of a wide-ranging, highly complex international fraud scheme, with links to the mafia and have been investigating Scaglia. As a result, Swisscom has set aside SFr102 million for the fraud case. The affair has already cost the Swiss company a 7.1 per cent reduction in profit for 2010.

(With input from Matthew Allen)