Moody’s: European telecoms operators’ opportunities to cut costs are diminishing

Global Credit Research

Opportunities for European telecommunications service providers to achieve further cost savings through headcount reductions are diminishing and this is credit negative, says Moody’s Investors Service in a Special Comment published today.

Moody’s notes that, to date, European telecoms service providers have used staff cutbacks as their main source of cost savings and to ease pressure on revenues. “Achieving further gains in this area will be more challenging, particularly for companies that are already close to peak levels of efficiency,” says Iván Palacios, a Vice President — Senior Analyst in Moody’s Corporate Finance Group and co-author of the report.

“The operators’ fading ability to keep cutting staff costs is credit negative for our rated European telecoms service providers because cash flow generation will come under increasing pressure if revenues continue to decline,” explains Mr Palacios. “In addition, reducing their headcount beyond certain levels could result in compromised customer service, which could in turn affect brand perception and the long-term prospects of the business.”

Moody’s used two ratios to measure telecom operators’ staff cost efficiency for its analysis: (1) annual revenues per employee and (2) staff costs as a percentage of revenues. The analysis shows that, among Moody’s rated European telecoms, BT Group plc (BT, Baa2 stable) has the most flexibility to continue cutting staff costs in order to mitigate pressure on revenues. BT is a fixed-line centric operator — the only large incumbent in Europe lacking a mobile business. The company inherited a large workforce after privatisation and therefore still has room to adjust these legacy structures.

Other companies have room to improve their efficiency levels, but Moody’s notes that their ability and willingness to implement further headcount reduction plans could be constrained by varying degrees of government ownership and, in some instances, the presence of civil servants within the workforce. These companies include France Télécom (A3 stable), Deutsche Telekom AG (Baa1 stable), Telekom Austria AG (Baa1 stable), Telekom Slovenije d.d. (Baa2 stable) and Hellenic Telecommunications Organization S.A. (OTE, B2 negative).

Moody’s notes that some operators have already made substantial cost-cutting efforts and are close to their efficiency ‘ceiling’ in relation to significant additional headcount reductions. This is because they generate high revenues per employee and have relatively low staff costs as a percentage of revenues, and therefore are already fairly efficient. These companies include Belgacom Societe Anonyme de Droit Public (Belgacom, A1 stable), TeliaSonera AB (A3 stable), Telenor ASA (A3 stable), Elisa Corporation (Baa2 stable), TDC A/S (Baa2 stable), Telecom Italia S.p.A. (Baa2 negative), Koninklijke KPN N.V. (KPN, Baa2 negative) and Portugal Telecom SGPS, SA (Ba2 negative).

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