Telecoms companies have spent the past few years furiously cutting their debt. But now they are starting to pile it on again.
Telecom Italia has taken on €14.5 billion of new debt to finance a merger with its mobile subsidiary TIM. Spain's Telefónica has submitted a preliminary offer for Cesky Telekom, which it would probably finance with €5 billion of debt. And BT, the UK ex-monopolist, recently said that it was reviewing its debt target.
This revival of interest in borrowing is striking. It is only a few years since debt almost brought the sector to its knees. Having borrowed far too much to finance acquisitions in the late 1990s, companies spent the next three years paying for it.
Now they are back in the habit. Is this an extraordinary lapse, or have the markets been through their cleansing process incredibly fast?
Incentives to borrow
Happily, the latter seems closer to the truth. After the bubble, telecoms companies diverted their prodigious cashflows to cutting debt as quickly as possible. Most have got their net debts below the two times ebitda mark considered a prudent level of leverage.