Richard Moat: I’ve turned around three businesses and the
new CEO has done more than that
Nearly a year after Eircom became one of the few incumbent operators in a developed economy to need rescuing from bankruptcy, the chief financial officer in the new management team says they are exceeding the shareholders’ five-year recovery plan.
In March 2012 Eircom, the biggest operator in Ireland, went into examinership, the Irish version of the US Chapter 11 bankruptcy protection. When it emerged 100 days later it was owned by its lenders. ST Telemedia, the Singapore state-controlled investor that had been the biggest shareholder, lost its investment.
The new owners, the biggest of which is an offshoot of Blackstone, the US-based asset management and financial services company, put in a new management team, led by CEO Herb Hribar, former CEO of carrier ethernet exchange CENX.
Richard Moat joined on the same day as Hribar as CFO. He is the former CEO of T-Mobile UK and then was CFO of Everything Everywhere after Deutsche Telekom and France Telecom-Orange formed their UK joint venture.
Now he has a key role in the rebuilding of Eircom as a viable operator. “The CFO’s role has changed substantially in the past few years.” Once, the finance role “was looking at historical numbers — reporting what the business had done in the quarter, the half or the full year”, he says.
That’s changed: “These days the role in preparing the management accounts are just the entry ticket to the playing field.” CEOs expect their CFO to make “a wholehearted contribution to corporate strategy”.
However, the CFO “can’t be a cheerleader for what the CEO expects”, he warns. “You need to play a full role in the evolution of strategy. Finance is a true partner.”
And many CFOs already have wider responsibilities than finance. At Everything Everywhere Moat was responsible for areas including network IT, customer services and the supply chain, with 12,000 people reporting to him. Now, at Eircom, Moat has a number of divisional CFOs reporting to him — and he also runs the company’s mobile business, Meteor.
The CFO’s role is “to make a major contribution to the development of the business and to make sure the company takes the right commercial decisions and its going in the right commercial direction”.
So how has Eircom progressed since he and Hribar joined the company? “When the company emerged from examinership the debt was cut by about 40%, from €4.1 billion to €2.345 billion — that’s a number that’s easy to remember — and we have been looking to significantly improve the performance of the debt,” says Moat.
The new owners are partly locked in to the company until at least June 2014, because “the equity is stapled to the debt”, says Moat. If they want to trade the debt, they have to trade the equity too.
The figures show that when Hribar, who was COO of Eircom some years ago, and Moat, who’d also run Orange businesses in Thailand, Romania and Denmark, took over the Irish operator was still facing tough problems.
At the end of September 2012 the company had only 979,000 fixed-line customers, having lost 98,000 since September 2011 — a 9% annual loss. On the mobile side the company’s profit margin was just 2%. “I’ve never come across any other mobile operator with such a low margin,” says Moat.
Results for the company’s financial year that ended on 30 June 2012 showed a 10% reduction in revenue and a 14% fall in ebitda. “It was largely the loss of fixed lines” that caused those numbers, says Moat. “We had to stem that loss.”
The company has made progress already, he says. “We were losing 9,000 lines a month. We’ve got that down to 5,000 a month.”
How? “We’ve put a lot of focus on saving customers. We have a dedicated team of people who handle calls from customers who are thinking of leaving.”
The loss extended to broadband customers, as competitors — including mobile operators — increased their offers. “We had 454,000 broadband customers at the end of September, and that’s a 42% market share.” Eircom’s total is now starting to grow, he says. “Most were moving to the competition. It’s a highly competitive market.”
Now, Eircom believes it has the crucial service that will give it market advantage: next-generation access fibre. The investment for this started in the depth of Eircom’s troubles in 2012, and the company plans a commercial launch by the end of June 2013, by which time the service should be available to half a million householders.
“Our network already passes 200,000 homes,” he says, and the company plans to pass 700,000 by the end of 2013. The programme, due to be complete by the end of 2014, calls for a million homes to be accessible by fibre.
Once the new network is launched Eircom plans to start trying out its own IPTV service, with a commercial launch in the third quarter of 2013. Moat believes this will be an attractive product in a country that has traditionally been a strong market for cable: the biggest cable operator, owned by UPC, is believed to provide services to 920,000 homes, out of 1.3 million that get digital cable or satellite TV.
“We will have better capacity because of fibre and that will give us the ability to deliver TV, which will make us the only player in the market with a full quad-play capacity.”
The mobile side of Eircom’s business is the second task that Moat and his partners have to tackle. The business is unusual not only for the low 2% profit margin, but also because Meteor — started in 2005 — is Eircom’s second attempt at mobile.
The first, Eircell, became part of Vodafone in 2001. The Eircom group received no money; instead Eircom shareholders received shares in Vodafone in exchange for the business. Four years later, Eircom paid €420 million to buy its way back into mobile by acquiring another operator.
Why are Meteor’s margins so low? “The regulator has reduced the mobile termination rate, general competition and the growth of smartphones,” says Moat, before pointing out that “all mobile businesses face those issues and they don’t have such reduced margins”.
Again, he believes technological investment is part of the answer. The Eircom group did well from Ireland’s spectrum auction in October 2012, “and we now have to ability to offer 4G on both 800 and 1,800 megahertz bands”, he says.
That means that company hopes to launch wireless broadband using LTE as well as fixed broadband using fibre in 2013. Eircom has a network-sharing deal with Telefónica’s Irish O2 operation, and that will keep 4G costs down, he says.
“We already have about 230 sites consolidated between the two businesses, and we are reaching the point where we award the contract for all the 4G network equipment to one of the infrastructure vendors.” It will be a joint contract with O2, he confirms.
Sorting out the fixed and the mobile sides of the business are two of the three tasks that the new management team has set itself. “Our other initiative is a reduction in operational costs and capex, so that we can be more rigorous about the internal rate of return.”
This is receiving “a huge focus”, says Moat, backed by a benchmark study by the Oliver Wyman management consulting group which compared Eircom against its fixed and mobile peers. “Based on that report, we have to take out €100 million between now and the end of the 2013-14 financial year — that’s 17 months away.”
The company has announced that it wants to reduce staff levels by 2,000 “and we are negotiating with the unions on this — it is a very sensitive issue. Talks are in progress.”
These negotiations won’t be as difficult as they may have been when the Irish economy was at its lowest, but the country’s business federation has increased its estimate of economic growth from 1.2% to 1.8% a year. “And I’ve seen deals by private equity groups that show their view of the economy is that it is at the point of turning,” says Moat. “The trough was lower than it was in the UK.”
Shape and structure
The Oliver Wyman-inspired programme is intended “to change the shape and structure of the organisation so we do things much more efficiently than before”.
But turning organisations around is just what the new CFO and CEO do. “I’ve turned around three businesses and Herb has done more than that,” says Moat.
When Moat became CEO of Orange Denmark in 2002 “it had a negative enterprise valuation of €750 million and we sold it for €600 million to TeliaSonera two years later”, he says. As CEO of Orange Romania a few years later he achieved “significant improvements” in the performance, “taking it from number two to number one, beating Vodafone”.
He left the Orange group in 2009, to become managing director of Deutsche Telekom’s T-Mobile UK, only a couple of months before France Telecom-Orange and Deutsche Telekom announced their plans to merge their UK operations. “When I joined T-Mobile the ebitda margin was 13% and when we went into the joint venture it was 22% that quarter. There was a significant improvement in a year.”
“There are lots of similarities” between Eircom and some of these operations, says Moat, “but there are also differences. One of the great strengths of Eircom is that it has assets in virtually every sector.”
When the company emerged from the examinership in mid-2012 the new owners gave it a five-year recovery plan. “We think it’s pretty robust,” says Moat, “and we are tracking that plan, and ahead of it.”
Of course “there are always events you can’t predict that will knock you off course”, but Moat, Hribar and their colleagues are building in contingencies. “Our opex reduction will give us the headroom and improved liquidity, so that we can deal with the unexpected,” says Moat.
But he’s confident that Eircom is making progress. “I would say that by the end of our financial year 2013-14 this is going to look like a totally different company. The perception will have changed.”
And where then for Eircom? “In terms of what might happen, Ireland has 4.5 million people and it’s a very competitive market.” UPC has a strong position, but BSkyB — which sells digital satellite TV in Ireland — is likely to get into broadband, as it has in the UK, he feels.
Despite the increasing competition, Hribar and Moat’s strategy will allow Eircom to continue as an independent entity, he says.
But Eircom’s prospects and challenges are reflected by the industry as a whole. “The scale of investment required in telecoms is significant, and we’ve got both elements — fibre and 4G. Regulators seem not to have recognised that. If you’re putting that amount of capital at risk, you need a decent return.”
And he thinks that operators with both fixed and mobile businesses are being recognised as having an advantage over those with just one or the other. “Companies such as TDC in Denmark will be seen as more attractive over the next couple of years.”
More from GTB
Eircom restructuring shows a future way out of debt for ... 27 Sep 2012
Eircom appoints new management 06 Aug 2012
Lender group takes over Eircom 12 Jun 2012
Eircom to exit bankruptcy on June 11 23 May 2012
Hutchison loses Eircom plan in court 18 May 2012
Eircom seeks court protection from creditors 30 Mar 2012
Eircom moves on broadband despite crisis 13 Mar 2012