Swisscom takes €1.3bn charge on Fastweb

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Swisscom said on Wednesday that earnings for this year would be hit by a €1.3bn impairment charge on Fastweb, its ailing Italian subsidiary.

The charge, which the Swiss telecommunications group attributed partly to the eurozone crisis, will lower net profits by SFr1.2bn this year ($1.3bn). In 2010, Swisscom made SFr1.8bn after tax, and SFr1.5bn net in the first nine months of this year.

Analysts had long expected a reduction in the goodwill carried for the Italian internet and telecommunications company. But Swisscom, which is more than 50 per cent state-owned, had always defended the valuation.

Swisscom attributed its decision now to “the difficult economic situation and increasing interest rates” that had led to “reduced prospects for growth and higher cost of capital in Italy”.

Swisscom bought Fastweb in stages, starting in early 2007, paying a total of €4.6bn in what it described as a high growth, high technology business in a big and flourishing market.

Fastweb appeared a good, if expensive, choice, after a series of failed tilts by Swisscom at buying incumbent network carriers, including Telekom Austria, Eircom and Cesky Telecom, the main operator in the Czech Republic, which was acquired by Telefónica in 2005.

The deals were designed to compensate for limited growth, spiralling competition and eroding margins in Switzerland, as well as boosting motivation among Swisscom’s domestic staff.

But political differences in Switzerland, where Swisscom’s high annual dividends are an important source of income for the government, led to the group’s wings being clipped.

Management was forbidden to pursue bids for carriers with statutory telecommunications responsibilities – meaning former state-owned incumbents – prompting the swift departure of Jens Alder, Swisscom’s then chief executive.

By contrast, Fastweb was hailed as an example of a new strategy, with the Italian group expected to take telephony, internet and other services into millions of households thanks to broadband services using its newly installed proprietary fibre optic network. Some 2m private households are now connected.

The relationship became more complicated than expected for the Swiss, when Silvio Scaglia, Fastweb’s founder, and others, became involved in an Italian tax probe at Fastweb.

Swisscom said the company had lived up to expectations in the corporate sector, with strong growth and earnings.

“With a market share of 20 per cent, Fastweb is the clear number two in the segment devoted to corporate customers, and is growing steadily,” it said.

But sales to private customers had “come under pressure in the last few quarters” after an initial growth phase because of intense and rising competition, pricing pressures and overall weakness in Italian private consumption.

“In the private customer segment, this has been reflected in a larger than expected decline in average revenues per user”, it noted. Additionally, Fastweb was “burdened with high bad debt losses”.

“The Fastweb writedown is no surprise and was already the subject of speculation last year”, noted Serge Rotzer, analyst at private bank Vontobel.

Carsten Schloter, Swisscom chief executive, defended in a conference call the Fastweb purchase price, which he said was in line with valuations of the time, although he recognised it appeared excessive in retrospect.

Swisscom stressed the impairment would not affect cash flow or dividends, with the group sticking to its plan to raise the dividend by SFr1 to SFr22.

Swisscom shares rose 0.6 per cent on Wednesday to SFr347.3.

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