Bargain Wars in Brussels: the members of the European Grocer’s Association (EU) all win their battle, but lose the war, letting the European citizens disgracefully down. The European Parliament has the chance to erase this flop.

Over and over again

I let you down

King’s X – Over and Over

On 7 and 8 February 2013, Brussels was the host city for one of the greatest showdowns in EU history: the EU budget talks 2014-2020 aka the Multiannual Financial Framework (MFF).

In this second MFF meeting (the first, failed meeting was in November 2012), the EU budget for the coming seven years had to be set. In case that the member states would not have agreed on the new budget for the EU during this meeting and would fail to do so throughout the remainder of this year, the budget for 2013 (inclusive a 2% inflation compensation) would be maintained in 2014.  

Fortunately, things didn’t come that far: after more than 24 hours of hard battles for the last Euro-cent, making it one of the longest meetings ever, an agreement was set.

Here are the pertinent snips from an article in the Financial Times on the EU MFF budget

Leaders agree cut to EU spending

Leaders agreed the first ever cut to the European Union budget after setting spending to the end of the decade at €960bln.

The deal emerged after a bruising battle that saw Britain’s David Cameron lead demands for deep cuts to reflect the austerity undertaken by many governments and François Hollande, French president, rallying the defence of EU spending to help recession-hit economies.

Angela Merkel, the German chancellor, helped broker the deal with Herman Van Rompuy, the European Council president, which includes a €1bln cut in spending on the Brussels bureaucracy and big reductions in cross-border infrastructure projects supposed to boost growth. However, €6bln was set aside for a special fund to tackle youth unemployment, which has spiralled following the financial crisis.

The seven-year budget, covering 2014-2020, is 3% less than the current budget, and well below the €1,033bln first proposed by the European Commission, the EU’s executive arm, at the outset of negotiations.

The compromise sets the figure for budget “commitments” – the maximum amount of money allotted during the seven-year period – at €959.8bln, while budget “payments” – the amount of money that can actually be spent – are more sharply reduced by €34bln to €908.4bln.

Most of the new cuts come from a fund to build cross-border infrastructure that the commission has touted for its potential to generate economic growth. The budget for agriculture – a key French priority – is being spared further cuts, although the seven-year total is more than 10% down on current spending.

This agreement has been created in the (in)famous European style, enabling all 27 member-states of the EU to come out as winners of this ‘superbout’, as everybody received a slice of the pie:

• The UK, Germany and The Netherlands got their desired reduction of the EU budget: down to €960bln from the €1,033 billion, as originally proposed by the European Commission;
  
• On top of that, the UK and The Netherlands – both net payers to the EU - maintained their discount on the EU contribution;
  
• France was able to continue most of its agricultural subsidies, keeping the farmers at home happy;
  
• The PIIGS countries maintained ample access to the structural funds, that enable investments in the infrastructure and other purposes to ‘reduce regional disparities in terms of income, wealth and opportunities’ (definition Wikipedia);
  
• The poorest EU countries (countries with a Gross National Income of less than 90% of the EU average) gained better access to the so-called Cohesion fund, which ‘contributes to interventions in the field of the environment and trans-European transport networks’ (again Wikipedia);

On top of that, Herman van Rompuy could write a ‘happy’ press release in which he ‘boasted’ about the achievements of the new EU budget deal:

• Compared to the previous Multiannual Financial Framework (MFF), there is an overall increase of €34bn (or nearly 40%) in the heading for Competitiveness for Growth and Jobs;
  
• There will also be a real, net increase for programmes like "Erasmus for all" and "Horizon 2020" for innovation;
  
• We have set aside €6bn for a new Youth employment initiative. A powerful incentive; 

After reading this, you might think that ‘everyone’s a winner’ with this European budget for the coming seven years, right?! Well, not exactly!

The EU-money that has been given away by lowering the EU budget to €960 bln, has been found in an €11 bln reduction of investments in trans-European transport, energy infrastructure and broadband networks and in a discount of €1 bln on the expenses of EU-institutions.

The investments in this cross-border infrastructure were exactly the investments that were aimed at the future of the EU and its member states. They were there to make the EU more modern and competitive and to further interconnect the European member states, for better cooperation in the future.

However, they were given away in favour of the ‘good old’ agricultural subsidies, which are present to maintain the status quo for especially the French and Dutch farmers, thus probably rewarding inefficient techniques and conservatism at one hand and animal-unfriendly mass-production of meat and poultry at the other hand.

Besides that, €6 bln for fighting European youth unemployment doesn’t really sound like ‘the mother of all solutions’. It smells like ‘tea from an already used teabag’.

Youth unemployment is THE biggest problem in today’s EU, is my opinion. In Greece and Spain more than 55% of youth is unemployed. This is a demographic timebomb, as these youngsters don’t have the means to raise a family and get children, but instead have to live upon their parents’ wallets. That is, if their parents still do have a job. If we are not cautious, a whole generation in those countries might get old in poverty and despair.

Also in many other EU countries youth unemployment is very high. The EU has an average youth unemployment of 23.6% and the ‘best’ scoring countries are Germany (8%), Austria (8.5%) and The Netherlands (10%).

This lousy €6 billion is not going to change one thing for these unemployed youngsters. And also the reduced investments in innovation will not add to the economic development of Europe and the European countries.

The 27 frogs in a wheel-barrow, that we lovingly call Europe, have to fight with countries that are either swimming in gas and oil (The United States and Russia), that have a lot of commodities, minerals and raw materials (Russia, China and Brazil) or that have almost unlimited numbers of cheap and well-educated workers, who can do the same job for a fraction of the money that workers in Europe ask (India, Korea and China). In other words: if we don’t pay attention, our continent will be in economic distress.

Europe can’t beat the aforementioned countries either on price of labour or on access to raw materials and commodities. That is a simple and plain fact. The consequence is that we should work harder and smarter.

This situation asked for a grand vision on the future from the leaders that the European citizens elected to represent us wisely and responsibly. 

In order to survive economically, the European Union has to stimulate education and innovation, out-of-the-box thinking processes, efficiency  improvement and a general level of excellence in the whole of Europe. The EU should be: 

• Fighting the devastating (youth) unemployment in especially the peripheral countries and Eastern Europe by creating new and useful jobs through the development of a EU-wide industry-policy.
  
• Endorsing efficient traffic of unemployed Europeans to places in Europe that are in need of workers
  
• Getting the best education possible for our youngsters and also for our currently working generations;
  
• Achieving better and more efficient (non-)financial services;
  
• Enabling new and groundbraking technical inventions that can set the pace for a new European era;
  
• Achieving breakthroughs in environmentally friendly, ‘green’, technology;
  
• Building more efficient production facilities that produce products of better quality at a lower price;
  
• Developing an agricultural industry that combines the latest techniques and agricultural innovations in combination with animal-friendly, safe and healthy production facilities; 

Sadly, we didn’t get this grand vision. 

To the contrary: this whole budget deal smelled like the ‘annual assembly of the European Grocer’s Association’: everybody has just been fighting for pennies and bargains, instead of looking for a big picture of where Europe wants to be in 5-10 years. Everybody won their battle, but lost the war.

Fortunately, the European Parliament can still say ‘nyet’ to this budget proposal, as its consent is legally required. Although such a rejection would initially lead to more administrative chaos and angry faces within the EU, it could force the leaders to look at the tasks ahead more responsibly.

Still, the odds are that the EU will continue to muddle through the next seven years: without vision and cooperation and without innovation. That would be a total disgrace.

Royal Imtech N.V. gets lost in Polish morass: Dutch technical service provider forced to write off €100 mln on work-in-progress bill for Warsaw amusement park

Like I wrote earlier this week, this has not been the best of weeks for investing in Dutch stock. Apart from the nosedive that Dutch telecom company KPN took after the presentation of its annual rates and the announcement of a follow-on stock offering of €4 bln, there was one other tech fund in distress: Royal Imtech N.V (IM) aka Imtech.

On Monday, 4 February 2012, Imtech’s  CEO René van der Bruggen made a statement that a €100 mln bill on work-in-progress for an amusement park in Poland should be written off. The company had received a bill of exchange from its Polish customers as a payment for already carried out activities. Unfortunately, this bill bounced at the banks, due to the fact that the Polish customers allegedly didn´t have their financing in order.

According to Van der Bruggen, Imtech could even be forced to make larger write-offs on this Polish project, as the total damage for the project was yet under investigation.

A consequence of this huge write-off was that Imtech couldn’t meet its banking covenants anymore, with the possible result that credit lines from the banks would be suspended. This was the reason that dividend payments for the shareholders of Imtech had been cancelled and the presentation of the annual data had been postponed until further notice.

Het Financieele Dagblad wrote on this developing story:

Imtech suffers from a €100 mln financial blow in Poland

Technical service provider Imtech should write off €100 mln on projects in Poland. The company, with a quotation on the Amsterdam stock exchange NYSE Euronext, announced that it couldn´t meet its banking covenants anymore. The publication of the annual data, originally planned for Tuesday, 5 February, would be postponed until further notice.

Imtech stated on Monday that it is hit hard by the lacking funding of its largest principal in Poland, as well as through other irregularities on its projects in the Eastern European country. Imtech stated that it is going to perform a forensic investigation into the events in Poland and the situation that emerged from this. During this investigation, the local Polish management has been suspended, according to the company in a press release.

The Executive Board of Imtech expects a depreciation of at least €100 mln for expenses already made. As the exact size of this depreciation cannot be set at this moment, Imtech is not able to aggregate the data for the annual report 2012. Therefore the presentation of the annual data is postponed until further notice, as well as the annual shareholder meeting, originally planned for April 3.

The depreciation of at least €100 mln concerns three projects for Adventure World Warsawa (the building of a newly planned amusement park in Warsaw) and a project concerning energy-generating biomass plants, also in Warsaw, with an aggregated value of €757 mln.

Imtech found that the advanced payments coming from these four Polish projects were not at Imtech’s disposal, as was originally agreed with the principal. This is allegedly caused by the fact that the principal doesn’t have its funding in order.

The news on this financial setback hit the shareholders like a hammer, especially as it was not clear yet how much damage the project in Poland would really deliver eventually. The fund has been slaughtered at the Dutch stock exchange and lost 45% of its rating in the Midkap index (an index for medium-sized funds) in one day. The statement of the executive board, that there had possibly been other irregularities within Imtech´s Polish projects was even more troublesome for investors and shareholders.

Adventure World, the Polish amusement park and main protagonist in this drama, was somewhat puzzled by Imtech´s statement on Monday, as can be written in these snips from a BNR news-radio article.

According to the Dutch director of Adventure World, Peter Mulder, Imtech had exaggerated the value of the activities it had carried out for the park. It was unclear to him why Imtech had set the amount of damage this high, as the expenses that Imtech had made would have been significantly lower. ”This amount of €100 mln is not correct. I´m certain about that”, Mulder stated.

He further stated that he had not yet received an invoice from Imtech for the preparing activities in the park, that should be opened in 2015. His company would have made a €200 mln advanced payment on a blocked account.

After reading this opaque story, I can imagine that the shareholders and investors were not exactly happy about the ´adventures´ of Imtech in Poland.

Especially the story concerning the bounced bill of exchange and the blocked accounts with €200 mln in advanced payments by Adventure World that do or do not exist, leave ample room for speculation. As a consequence, there had been the designated write-off of €100 mln on work-in-progress, that had been disputed by Adventure World director Peter Mulder as being exaggerated.

On top of that, there has been the message from CEO Van der Bruggen that Imtech´s Polish projects could have been subject to´irregularities´ during the execution. The expression ´irregularities´ could point at a wide array of disturbing causes.

In my humble opinion (warning: this is pure speculation on my behalf!), even bribery of Polish officials could be among these causes. The situation at Philips Poland of 1.5 years ago showed that these things can never be ruled out.

There is one other disturbing fact: when I look at a photo-series of World Adventure amusement park, connected to this article in the FD, I wonder where the €100 mln in activities, carried out by Imtech, did go? I don't see this park being finished (no way!) within two years and I don't see how millions of Euro's could be spent on this park, unless in drawings, computer-designs and blueprints.

The fact that – apart from the Polish officials – also the German management of Imtech have resigned, gives much food for thought. I suspect that these Polish adventures of Imtech could have an unpleasant follow-up in the very near future.

To be continued…

Telecom behemoth KPN must beg for mercy from its shareholders, who must accept… a €4 billion follow-on stock offering

From 2003 until May, 2011, the Dutch telecom company KPN was a dead-cert to the investors: not too exciting, but with always the right bang-for-the-buck. 

Former CEO Ad Scheepbouwer thought that, in order to keep the shareholders happy, a steady flow of high dividends was exactly what the doctor ordered. And happy the shareholders were… Especially the ones with a long-term vision that ended on dividend payment day. Unfortunately, this high-dividend strategy turned out to be a losing bet for KPN eventually. And now the grapes are sour for the shareholders.

The necessary investments for the future, in order to keep its fixed and mobile network up-to-date and state-of-the-art, were neglected by KPN in exchange for short-term ‘shareholder value’. In other words: the company has been used as a cash cow.

Currently the telecom behemoth is hit by a perfect storm of:

• An outdated infrastructure that is in desperate need of updating and/or replacement, if the company doesn’t want to lose its current position on the business-2-business fixed telephone+internet market and the b2c (consumer) market for 'internet+television+fixed voice-over-IP telephone' in The Netherlands;
  
• An earnings-model for smartphones and mobile computing that is still lightyears removed from one that compensates the lost earnings for normal telephone calls and SMS’s;
  
• A 4G-auction gone awry that cost the contenders about twelve times as much as initially planned: €3.8 bln instead of €300 mln. KPN was one of the biggest ‘victims’ of this auction, as it paid no less than €1.35 bln for its package of licenses;
  
• A war-chest that is depleted by the earlier excess dividend payments and the failed auction;

What makes things worse for KPN is that the money invested in 4G-licenses is dead money for the time being. As long as the new network, hosting the 4G-protocol, is not rolled out, these licenses don’t yield any revenues. This is the reason that KPN at this moment is truly hurrying to deploy the 4G mobile network in The Netherlands. Complicating factor is that deploying such a network costs massive amounts of money too.

In my earlier article on the 4G-auction, I estimated the costs for rolling out the 4G network itself in The Netherlands at €1 bln. Yesterday, however, a KPN official stated on BNR business-news radio that the costs for rolling out the 4G network would be closer to €2 bln, which made my estimate too optimistic.

With these circumstances in mind you can probably imagine that KPN didn’t have the best results for 2012Q4. And indeed, it didn’t, according to an article in Het Financieele Dagblad (www.fd.nl):

KPN sees further deterioration of results in Q4

During 2012Q4, Dutch telecom company KPN saw its sales and profit further deteriorate. The company only met its financial goal for 2012 by a whisker, thanks to the sale of a large quantity of radio masts to the tune of €480 mln.

This Tuesday, 5 February 2013, the telephone company published its Q4 data and the annual data on 2012. Last Quarter, sales dropped  by 7.3% and the revenues dropped by 15% y-o-y. The cashflow even dropped by 33%. “We have to deal with a period of reduced underlying profitability in all three core markets”, according to CEO Eelco Blok in a spoken statement during the presentation of the Q4-data.

The economic setbacks forced KPN to lower its targets for the broadband market, where the company desires a market share of 40%, thus postponing the earlier target of 45% for this market.

The company doesn’t mention any concrete targets for 2013, except that the investments should remain below €2.3 bln. In 2014, a period of ‘stabilisation’ will occur, according to KPN and afterwards the lowered dividend of 3 cents per share should grow again.

With €12.7 bln for the whole year 2012, sales were 3.5% lower than the previous year. KPN blamed this partly to the underperforming mobile branch and partly to the sales of parts of its ICT-subsidiary Getronics, which could not add to profit anymore. 

With €693 mln profits were 55% lower than the previous year:

• In 2011, KPN enjoyed a special tax break, which it did not have in 2012;
• Restructuring costs for the company grew during 2012;
• Operational results were under pressure in 2012;

In 2012, the company invested 7.9% more than in 2011.

A positive side to this annual data is that KPN increasingly invested in its network in 2012, which it failed to do sufficiently in the previous years. It seems that Eelco Blok is well on its way to cleanse the company from the negative influence of Ad Scheepbouwer’s senseless policy concerning dividends and investments. This might not make him popular among the shareholders, but it makes sense for the future in my opinion. 

Nevertheless, for 2013 Blok announced an investment ceiling of €2.3 bln, which doesn't seem smart if you really want to update your fixed and mobile infrastructures.

A bad thing is that while the investments in the networks (mobile as well as fixed) in The Netherlands, Belgium and Germany will remain enormous, the revenues will not grow accordingly.

In earlier articles (see the first link in this article), I wrote that fixed and mobile internet, telephony and television will probably become utilities like gas, water and light. You can buy them for a competitive price at the highest quality from a substantial number of nearly-equivalent providers. In the Dutch market, it doesn’t matter whether you buy these services from the telephone companies, the ‘cable(-TV) guys’ or through providers of satellite broadcasting services (TV and telephone): quality is optimal and the products are sold relatively cheap.

As the quality, speed and coverage of fixed and mobile services will come close to optimal (i.e. maximum speed and quality) soon for every provider of these services, this leaves only price as a unique selling point. 

SMS and mobile telephone calls had always been the genuine cashcows from 1994 until 2010 for the telco’s, but these services will not flourish anymore… ever.

The free apps (Whatsapp, Twitter, Skype etc.) that use the (nearly free) broadband possibilities of the smartphones, make this impossible. Even if Skype and Whatsapp want to ask a (token(?)) price for their services, there will be a herd of other app-makers and companies that will offer these services for free again.

As there is only the price to compete with, this could easily lead to a price war between the telco’s, the cable guys and newcomers on this extremely competitive market. In my opinion, this reflects a grim outlook concerning the future profitability of KPN and its peers.

And there was more yesterday in the statement of CEO Eelco Blok: He wanted to make the balance ratios of KPN more healthy and wanted to enable the necessary future investments in the fixed and mobile infrastructure. To achieve this, Blok announced a €4 bln (!), dilutive, follow-on stock offering for KPN for this year, exclusively to holders of current stock: a so-called claim-emission in The Netherlands.

This announcement hit the shareholders like a cluster bomb. After a catastrophic drop in the stock rate of 23% at the beginning of the trading day, KPN ended the day with a still massive 16% loss on its stock. This was the second day in a row that a tech-stock showed disastrous results at the stock exchange, after Imtech one day earlier.

One of the people most hit by the drop in stock rates of KPN, was Carlos Slim of América Móvil, officially the richest man in the world. Since he bought his 28% decisive stake in KPN, the Dutch telecom behemoth already cost him €1.7 bln in losses.

I don’t give advices on http://ernstseconomyforyou.blogspot.com, concerning buying or selling certain stock, as this is not my business. Therefore I don’t take any responsibility if you follow up my “non-advices” anyway.

Still, it might have been one of my best non-advices to my readers, when I wrote in my article “Is the fairytale of unlimited profits in the telecom business finally over? Why investors in Dutch telecom behemoth KPN should consider selling their stock to América Móvil!”:

Currently, there are lots of tricks and stunts that telecom providers pull to keep customers under contract, while paying lots of money:

• exclusive phone contracts (Apple(!)) with high subscription and usage fees;
  
• cheap or free smartphones (non-Apple) with high subscription and usage fees;
  
• opaque contracts and subscription forms that are impossible to comprehend for normal citizens;
  
• contract-limits for data usage;
  
• very expensive data usage beyond the contract-limits;
  
• pinched-off access to free apps that substitute dearly paid telecom services;

I think this business model will disappear to be replaced with a business model that treats fixed and mobile internet as a utility. The customer buys a phone and pays a very limited fee per month for internet bandwidth. All ´classic´ telephone actions (calling, SMS-ing) will go via IP connections, as there is no need anymore to use the classic digital voice or data connections.

Based on this opinion that I still endorse completely, it would be a smart move of the Dutch shareholders of KPN to take the money of América Móvil and run… KPN has been and still is a very good company, that will present its shareholders with decent profits in the future and will remain a leader in innovation in my opinion. However, I strongly doubt that this company will be the money machine with the excess profits it had been before. The same is true for its main competitors in The Netherlands and abroad: T-Mobile, Vodafone, Téléfonica and others.

The decreasing profits of KPN in 2012 and especially yesterday’s events show in my opinion that I was right on May 29, 2012 and still am right with these assumptions. All shareholders that sold their KPN shares for €8 to Carlos Slim, had a pretty good bargain. The others that kept the KPN stock, including Carlos Slim himself, saw its value shrink to €3.45 as of yesterday.

While ‘slim’ in Dutch means ‘smart’, it doesn seem to apply to Carlos Slim’s takeover of KPN. Maybe, times do still change for him, but I’m afraid they don’t…