CSPs facing the challenge of home market saturation, increased competition and lower margins have a number of options to take up in order to improve shareholder value. Cutting costs brings the fastest results both to bottom line and share price, but itâ€™s not always the best long term path.
Aggressive and cash-rich CSPs are looking more and more at entering other markets, whether as a new player or by acquisition. Nothing new there, but the results for early movers have been mixed and what may work well in the home market may not always translate into the foreign one, particularly management style and accounting policy.
International expansion is not for the faint-hearted either. It usually involves some sort of funding component from third parties, extensive due diligence, foreign ownership rules, national security and legal compliance, and thatâ€™s before the deal is done.Â The real battle begins after the takeover during the settling in period and may involve a number of third parties contracted to help in the â€˜change managementâ€™ program.
Then, of course, is the politics, both internal and external. The former is always a real nightmare which often results in the loss of many good people who are targeted by others fearful of their abilities, and the latter by customers that may be reluctant to support any foreign owned regime.
For investors this is all pretty much irrelevant and when quarterly results are published they only want to see improved revenues and margins, anything less is just not good enough. This week saw the release of Bharti Airtelâ€™s first results since the completion of its foray into the African market. Early days yet but despite adding 3 million subscribers in its home market of India during June, stiff competition left it with a 32 per cent drop in net profit. However, the future looks bright not only from the African investments but that ARPU in the home market only fell 2 per cent, arresting an alarming trend over the last year.
Nevertheless, the real worry for the big players such as SingTel, Bharti, Vodafone, Telstra, etc. comes from a source totally outside their control. I refer to foreign currency variations and their subsequent gain or loss in any one accounting period. So often we see the international properties performing brilliantly in their home market with substantial gains only to be reported poorly back at head office in a country a experiencing a strong currency period. Most of the companies listed above know how agonizing this can be. Try as they might to balance their international portfolio they can never predict the effect of currency movements in any period and the effect it has on their bottom line reporting and subsequent share value.
Bharti lost US$40 million to currency moves in the last quarter alone. SingTel said earnings before interest, tax, depreciation and amortization (EBITDA) in Singapore over the full year would decline while those in Australia would rise, although they could be affected by currency fluctuations. When you factor in the roll up effect from SingTel’s inversment in Bharti, it starts to get very complex.
Of course, currency movements vary from country to country and region to region but variances of tens of millions could be very handy for limiting any cost cutting exercise and the loss of jobs that it usually includes. Some would argue that gains and losses usually balance out over a gven accounting year, but this is not always the case. Anyway, try telling that to a fickle share market that ony likes hearing good news every reporting period!