Cash Management

Pay Down Debt, or Buy Back Shares?

Six months ago Telekom Austria introduced investors to a new cash-management strategy. So far, it seems to be working.
Marie LeoneNovember 27, 2007

With its cash use slightly out of balance with a new guiding principle, Telekom Austria Group will be paying down debt before it restarts its share-buyback program. “According to the principles we are applying, we have to deleverage the company to the level of two times net debt-to-EBITDA,” said company CFO Hans Tschuden during an interview with CFO.com on Tuesday. “Once we are back at two times, we can restart the share-buyback program.”

Tschuden’s fiscal discipline is based on a holistic, four-pronged approach to cash management that the Vienna-based telecom company adopted in April, at the same time Tschuden took the reins as finance chief. Now, six months into its new strategy, Telekom Austria’s principles are being tested as the company must counter the effects of its recent $1.1 billion acquisition of MDC, a regional Belarusian mobile phone operator.

Telekom Austria closed the MDC deal last week, using existing credit facilities to fund the purchase of a 70 percent stake in MDC’s parent, Cypriot SB Telecom. The acquisition, which is part of the company’s push into Eastern Europe — and includes recent purchases of phone operations in the Republic of Macedonia and the Republic of Serbia — increased Telekom Austria’s debt load. That, in turn, forced the company to shut down its share-buyback program, albeit temporarily. Here’s why.

Tschuden explained that the company’s new plan breaks down cash-use options into four main categories: reducing debt if it’s too high to maintain the company’s current credit rating; paying out dividends to shareholders; investing in growth opportunities; and repurchasing company stock. The plan also sets two targets: a leverage level of two times debt-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) and a dividend policy that pays out 50 percent of net income to shareholders.

Under the plan, the company must maintain the target levels, and once that is done, it can consider investment in growth opportunities. If no profitable projects are in sight, the company returns excess cash to shareholders in the form of a buyback. The company is in the third year of a four-year, 46 million-share buyback program that is slated to end by November 30, 2008.

The plan was put in place to deal with the “substantial free cash flow” the company generates, said Tschuden, who explained that most profitable telecom companies generate a considerable amount of cash.

Tschuden thinks the cash-use plan is unique because other companies don’t publicly state that their principles and targets work in concert with one another. Instead, they tend to highlight a particular buyback program or debt-level target, ignoring the interlocking relationship. “I don’t see a lot of companies that look at all four elements and communicate how they link to each other,” he commented.

He also says that investors are keen on the added transparency the plan provides, because they “know what to expect” from the company. Further, Tschuden says, the plan allows the company to strike a balance between the demands of shareholders and those of bondholders, pointing to the leverage and dividend targets and the potential for buybacks. He said, “Shareholders would want to lever up to maybe four times net debt-to-EBITDA, while bondholders would be afraid of doing that.” So the plan gives the two stakeholders “at least a part of what they demand without optimizing one [to the detriment] of the other.”