Global Insight Perspective | |
Significance | Hutchison Whampoa's 3 Group is yet to report positive earnings as the combination of high customer acquisition costs and regulator-mandated price cuts keeps EBITDA in the red. |
Implications | The 3 Group's hopes of a 2008 financial revival may be premature as the effects of the EU-sanctioned cuts in mobile roaming charges begin to bite. |
Outlook | Given the current uncertainties in the global financial markets, any talk of a takeover for the 3 Group remains unlikely in the near term. |
Hutchison Whampoa's 3 Group has posted a 72% year-on-year (y/y) improvement in first-half 2007 loss before interest, tax, depreciation, and amortisation (LBITDA) as the effects of the Bersani Decree in Italy cancelled out a reduction in customer acquisition costs (CAC). The 3 Group's LBITDA fell to HK$1.61 billion (US$205.5 million) from HK$5.69 billion a year earlier, with overall CAC falling 15% y/y to HK$8.43 billion from HK$9.9 billion. In a statement, the group said the Italian Bersani ruling, which abolished recharge card fees charged by mobile operators for prepaid services, shaved off more than 2 euro (US$2.72) from 3 Italia's 12-month ARPU. Overall revenues were up, though, notching a 28% y/y growth to HK$28.19 billion from HK$23.51 billion a year earlier.
Other indicators for the 3 Group also improved in the six months ending 30 June 2007. The 3 Group's customer base increased by 7% to 15.9 million customers, with post-paid customers accounting for 48% of the total customer base from 45% a year earlier. Customer churn was also down, falling to 2.7% from 3.2% a year earlier, while the active customer count improved to 80% from 79% at the end of 2006. The effect of the X-Series helped raise the contribution of non-voice services to 30% of overall revenue from 28% at the same time in 2006 (see Australia: 22 August 2007: Hutchison Australia Narrows Losses in H1).
3 Group's Customer Numbers | |||
Prepaid | Post-Paid | Total | |
Italy | 5,566 | 2,111 | 7,677 |
United Kingdom & Ireland | 1,623 | 2,472 | 4,095 |
Australia | 157 | 1,293 | 1,450 |
Sweden & Denmark | 112 | 729 | 841 |
Austria | 138 | 336 | 474 |
Total | 7,596 | 6,941 | 14,537 |
Source: Hutchison Whampoa | |||
Outlook and Implications
Elusive Positive Earnings: Despite a concerted effort to end its era of losses, the 3 Group has not managed to report overall group positive earnings. Unfortunately, efforts to reverse that trend in 2007 continued to prove elusive as the Bersani Decree in Italy, plus cuts in interconnection rates in Australia, Italy, and the United Kingdom, conspired to keep the company earnings in the red. In a statement, Hutchison Whampoa said it expects to achieve its cash-flow target of reporting positive EBITDA after all CACs for the full second half of the year and positive monthly 3G earnings before interest and taxes (EBIT) on a sustainable basis in 2008, barring any further unfavourable regulatory or market changes. But that wish may also be premature as the effects of the European Union-mandated cuts in mobile roaming charges begin to eat into operators' finances (see United Kingdom: 29 May 2007: Ofcom's Mandated Cuts in Mobile Termination Charges Irks 3 UK).
Threat of Takeover Rescinds: Although the 3 Group's finances have not emerged from the doldrums, there is less talk of a takeover of its European assets. There had been speculation that the group's prime assets in Italy and the United Kingdom were enticing to the likes of Vodafone, which could want to prop up its own flagging market shares. However, concerns about how to deal with the less desirable operations in Austria, Denmark, Ireland, and Sweden coupled with the ongoing crunch in the global credit market mean any talk of a major asset sale is unlikely.