Econet's figures on rivals' profits seriously flawed say analysts

By PETER GRIFFIN

Analysts are pouring cold water on the bold claims of fledgling mobile operator Econet that its potential competitors Telecom and Vodafone are vastly more profitable than other telecommunications companies around the world.

The new player in the mobile market - which aims to set up a 2G (second generation) GSM network next year - has created a stir among its dominant rivals over financial data it presented to Parliament's commerce select committee in June in submissions on the Telecommunications Bill.

A "forensic reconstruction" of Vodafone's accounts suggested that the company's free cash flow - the cash left over when its total operating costs have been subtracted - was $300 million for the year to March 31, 2000, jumping to $550 million the next year and around $700 million for the March 2002 year.

The submissions also suggested that earnings before interest, tax, depreciation and amortisation margins for Vodafone and Telecom exceeded 70 per cent, double the 35 per cent average in the rest of the world.

Vodafone's reported figures paint a different picture. It posted a profit of about $41.5 million in the year to March 2001, compared with an $11.2 million loss in the previous period. Net current assets in the year to March were minus $130 million.

Analysts approached by the Business Herald say Econet's figures simply do not add up and have expressed concern that the committee may have been influenced by them in recommending changes to the Telecommunications Bill allowing Econet customers to "roam" on Vodafone's network and attach equipment to its cell towers.

Bruce McKay, head of research at DF Mainland, said Econet had selectively chosen available figures to paint a picture of a mobile industry reaping high margins on its subscriber base.

"If Vodafone is making that much money in free cash flow, they're making more than Telecom. The business model doesn't work like that."

Rob Mercer, Forsyth Barr's head of research, said Vodafone's cash was being funnelled into capital expenditure, ruling out the massive free cash flows Econet is suggesting.

"I would suggest that Vodafone's capital expenditure is running at $130 million to $150 million. Free cash flow would be negative." He added: "I hope that very little weight was put on those numbers."

The international comparisons were also way out, according to Sydney-based telecoms analyst Paul Budde.

"You cannot have margins approaching 80 per cent in the market that they operate in. And New Zealand has some of the lowest APRUs [average revenue per user] in the Western World."

But he added that, Econet's flawed arguments aside, the changes to the bill were needed to stimulate competition.

"The figures might not be correct, but you've got all the right ingredients of a duopoly situation in New Zealand as it stands."

David Cunliffe, the select committee chairman, played down the issue, saying the facts and figures in Econet's submissions were irrelevant to the committee's decision.

"It was seen by myself and other members of the committee as part of the cut and thrust of a lobbying debate. No particular weight was given to those assertions."

Vodafone has vigorously disputed the contents of the submissions, complaining to Mr Cunliffe and Parliament's Speaker, Jonathan Hunt, that it was not granted the "natural justice" of replying. Both complaints were dismissed.

Despite widespread scepticism from the financial community, Econet's director, Tex Edwards, stands by the figures.

He said the free cash flow numbers were reached by estimating Vodafone's expenses, including salaries, infrastructure costs and property leases.

Econet's network would start up early next year, eventually covering the main centres with up to 355 cell sites.

He said the first steps of commercial negotiations with Vodafone were finally under way, with the two companies exchanging letters.

The amended Telecommunications Bill is likely to be tabled in Parliament next week and passed before Christmas.

Act and National have voiced opposition to the amended bill, but the Government expects to have the numbers to put it through.