DCS expects acquisition prices to fall further in 2010

You previously said the acquisition value in H1 2010 would be under EUR 100 per cable subscriber. Why is this?

In 2007 and early 2008, transactions were made at EUR 150-200 plus per subscriber. At that time the market was effervescent, margins were high and Romanians’ appetite for consumption was rocketing: they wanted more and better services, and consequently more expensive ones. The transactions I am talking about were mainly in big cities and they set the market at those prices.

Since fall 2008, things have changed. Investors who then acquired those networks of subscribers have less money, the consumer is less exuberant, appetite for consumption is falling, and in big cities there is tough competition. Every urban consumer already has several triple-play options. So prices for acquisitions have fallen a lot. Plus there are investors who have diversified their investments outside of telecom, probably through bank loans, and they are now suffering a lot, especially ones who put money into real estate, so they have to sell what they can.

What acquisitions are you considering and at what price?

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We firstly want the respective network to be adjacent to ours. We look at the technical options to be able to upgrade to triple-play. So the cable network should be well made so we can supply internet and fixed telephony. Price is a factor, but it has to be in the immediate vicinity of my networks and be a good market for the products I intend to sell there. Currently, there are very small operators with several hundred subscribers, small ones with several thousand and medium ones which have 10,000-20,000. It depends very much on the local market, network value, client density and where the network is. So, a reasonable price can be anything from EUR 50-100 per subscriber. Last year we made no acquisitions, only consolidated those from 2007. We are in negotiations with firms but nothing is set because prices will continue to drop.

How many subscribers do small players have?

About 1 million non-consolidated cable subscribers belong to small companies. At the moment, there are several hundred cable operators in Romania and probably 80 percent of clients belong to the top firms. There are also at least 1 million subscribers of small operators which, at the moment, cannot sustain themselves financially from the point of view of investments, because you have to constantly invest in offering something newer than the competition, plus many require money to cover other needs. Most of these small operators are outside the big cities because those are already taken by the main operators.

Other firms, larger than DCS, may also be considering acquisitions. How do you think you will compete?

Our model of business is adapted to outside the big cities. Major operators in Romania have until now focused on large urban areas. They do not know how to adapt to our level of business. This is the strategy of our shareholders, while the shareholders of large operators are not interested in a strategy that would involve investing outside large cities.

How many clients do your two divisions have?

Dial Telecom (ed. note: the DCS division for business clients) has several thousand clients, from SMEs to national clients with a presence in the big cities. It is a rather large palette but we do not have clients under several tens of euros. At the moment, we are not interested in small companies because we use a technology based on fiber optics so services are targeted at large firms. DCS, through AKTA (ed. note: the division for residential clients), is active in satellite TV, cable TV, internet and landline telephony. We have about 80,000 satellite TV clients. For analog cable TV we have a little under 200,000. We have several thousand internet customers. Fixed telephony is very much at the beginning. We will launch digital television via cable, probably by the end of the year.

What is your network coverage?

We provide internet and landline telephony in the places where we have cable TV. At the moment, our main presence is in the Sub-Carpathian area in cities such as Timis, Mehedinti, Gorj, Arges, Prahova, Ilfov, Buzau and Vrancea. We also have a presence in Satu Mare and Neamt. We have concentrated our investments this year on upgrading the networks to offer internet and also on transporting the internet signal towards the respective networks, fiber optics, the implementation of an integrated system of billing, provisioning and reporting systems.

How many employees do you have?

At the moment, about 800 people work for DCS, of whom 700 are permanent employees. The number will decrease by several percentage points because we are adjusting to the market and if the market grows at a slower pace, we need to be more efficient.

How much does a company spend on acquiring a subscriber now?

There is the sales commission, the cost of the promotions that are made – these are the direct costs. Apart from this, there is the initial investment which goes into the network. Taking all of it into consideration, the investment per subscriber is several tens of EUR and the commission for acquisition and the promotions another several tens of EUR. This cost is in the same range as the price of acquisition if you buy a network, EUR 50-EUR 100. In our case, it is also within this range, depending on the market and the services offered to the respective clients. A client does not start bringing profit before two years, in the best case scenario, but normally it takes three-three and a half years, given the initial investment and the costs for the acquisition of the client, plus the operating costs.