Telecity Group Plc.: Financial, Strategic and Risk Analysis

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This report covers a comprehensive analysis of Telecity Group plc, which includes the overall analysis of the structure and operations of the Group, its market standing, financial performance, strategic plans and how it manages its exchange rate and country and political risk. At the end of this report, recommendations are provided for managing these risks more effectively.

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Overview of the Company

Telecity Group plc was founded in the year 1998 with its head offices in London. The Group offers services related to the networking of data centers which include collocation and other similar services for data mobility in the European region (Yahoo Finance, 2012). In addition to this, the Telecity Group plc also provides various other services which include hosting, support, infrastructural designing related to information technology and other internet and web-related services.

The operations of Telecity Group plc are spread in various large cosmopolitan cities in Europe through a network of 29 data centers placed in cities like London, Paris, Amsterdam, Milan, Frankfurt, Manchester, Stockholm and Dublin (Yahoo Finance, 2012). The company’s operations are headed by a board of directors comprising seven directors namely John Hughes, Michael Tobin, Brian McArthur-Muscroft, Simon Batey, Maurizio Carli, Sahar Elhabashi and John O’Reilly. Among these seven directors, Michael Tobin holds the position of Chief Executive Officer of the company (Telecity Group, 2012).

Turnover, Industry and Market Trends of Telecity Group plc

For the past five years, Telecity Group has been able to report a consistent increase in its turnover. The rise in turnover is justified from the figures presented in the table below:

Year 2007 2008 2009 2010 2011
Revenue GBP 97.9 million GBP 133.0 million GBP 169.4 million GBP 196.4 million GBP 239.8 million
Increase GBP 35.1 million GBP 36.4 million GBP 27 million GBP 43.4 million

Source: (Telecity Group, 2012)

On the other hand, although the company has a relatively lower market capitalization as compared to other market leaders, like Google Inc., William Hill plc, Baidu, Inc. etc., the company is still placed in a better position than others in terms of the market price of its stocks, i.e. GBP 839.84 (Google: GBP 682.96) and price-earnings ratio, i.e. GBP 3,558.64 (William Hill plc: GBP 1,844.44) (Yahoo Finance, 2012; Bloomberg Businessweek, 2012).

Financial Analysis

In order to conduct a financial analysis of Telecity Group plc, the financial performance of the last two years, that is 2011 and 2010 is being considered.

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Revenue Growth

As discussed in the previous section, the revenues of the company have experienced stable growth during the last five years. The revenue progression of Telecity Group is evident from the fact that the company’s total revenue in 2007 was GBP 97.9 million which rose steadily till the last year to reach GBP 239.8 million (Telecity Group, 2012).

Profitability Trends

Similar to the significant and consistent growth in the revenues of Telecity Group, the profits have also kept on growing for the past five years. In 2007, the earnings of the company reported before accounting for interest, taxation expenses, depreciation and amortization were GBP 23.4 million, which have reached GBP 106.2 million in 2011. This is a strong indication of the company’s efficient operations and business growth (Telecity Group, 2012).

Return on Capital

Following a capital-intensive business model, the company makes capital investments on a persistent basis. The capital-intensive strategy of Telecity Group has certainly been effective as it has paid back significantly (Telecity Group, 2012). Keeping in view the results for the last five financial years, i.e. from 2007 to 2011, the return obtained by the company on capital employed is shown in the table below:

Year 2007 2008 2009 2010 2011
Return on Capital 3.8 % 8.9 % 14.2 % 17.9 % 18.0 %

Source: (Telecity Group, 2012)

Weakness in Financial Position of the Company

The company’s debt to equity ratio can be considered as a weakness since the latest debt to equity ratio indicates a value of greater than 70. This means that the company’s funding majorly comes from debt financing rather than equity financing (Yahoo Finance, 2012).

Strategic Analysis

The company’s aim of expanding its services on a constant basis while considering the needs and requirements of its flourishing customer base has been successfully implemented over the years.

Growth Strategy

The growth strategy for power expansion has been implemented successfully over the past five years. The chart shown below indicates the extent to which Telecity Group managed to secure power levels during the past five years (Telecity Group, 2012).

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Year 2007 2008 2009 2010 2011
Available Power (MW) 33 38 51 58 68

Source: (Telecity Group, 2012)

Consequent to this growth in the revenues of the company, the overall profitability has also increased significantly during the past five years (Telecity Group, 2012).

Demand-Driven Expansion

In addition to this, the demand-driven expansion program of the Telecity Group has been successfully implemented. In this regard, the company has been able to make acquisitions to ensure the fulfillment of its power needs in the future. In 2011, the acquisitions made by the company reached a level of GBP 99.3 million, which is significantly higher as compared to the acquisitions made in 2010 amounting to GBP 20.5 million (Telecity Group, 2012).

Apart from these strategic initiatives taken by the company, the company has expanded its operations in different countries in the European region. The recent acquisition of Tenue Oy in Helsinki in 2012 has enabled the company to stretch its operations in Finland too (Telecity Group, 2012).

Risks Associated with Fluctuations in Foreign Exchange Rates

Owing to the fact that Telecity Group plc operates in different regions and thus has to deal in different currencies, therefore there is always a risk related to the fluctuations in exchange rates of foreign currencies. For the purpose of reporting its consolidated operations and results, the company translates its results into local currency, i.e. £, by using average exchange rates every year (Telecity Group, 2012).

As reported in 2011’s annual report of Telecity Group plc, the company faces significant risk as far as fluctuations in foreign currency exchange rates are concerned. This is primarily because of the fact that the company’s operations are widespread in European countries with different currencies and there is always a risk that significant fluctuations in exchange rates may affect the overall results of the company. These risks also include threats such as unfavorable effects on cash flows expected in the future and unfavorable effects on the results which have been reported by the company to its shareholders (Telecity Group, 2012).

In addition to this, the company has a dedicated team that determines, evaluates and analyzes the factors or issues which may pose risks for the business as a whole. The team is named Risk Working Group (RWG) which works in collaboration with the audit committee of the company and board of directors. RWG, apart from its other responsibilities, also identifies and assesses risks related to the fluctuations in foreign currency exchange rates (Telecity Group, 2012).

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Country and Political Risk related to Telecity Group’s Operations

As stated earlier that the company’s operations are well spread in the European region, which stretches from Stockholm (Sweden), Amsterdam (Netherlands), Frankfurt (Germany), Dublin (Ireland) and London (UK), Manchester (UK) to Paris (France) and Milan (Italy) (Telecity Group, 2012).

For the purpose of evaluating the risks associated with businesses in the countries in which Telecity Group operates, the country risk ratings issued by Euromoney can be considered as useful. As mentioned in the previous paragraph, there are seven countries in total in which the company operates, i.e. UK, Sweden, Netherlands, France, Germany, Ireland and Italy. Euromoney places countries in five different tiers based on the level of risk posed by the countries to businesses. The first tier includes countries with the highest scores, which reflects favorable business conditions. Similarly, the remaining four tiers include countries with higher risks and so on (Euromoney, 2011). In the ratings issued by Euromoney, Sweden, Netherlands and Germany are placed in Tier 1 with ECR scores of 86.97, 82.96 and 81.82 respectively (Euromoney, 2011).

On the other hand, France and the UK are placed in Tier 2 with their respective scores as 73.74 and 73.5 (Euromoney, 2011). Among the countries in which Telecity operates, Italy and Ireland are the only countries that are placed in Tier 3 with their scores as 57.75 and 57.51 respectively (Euromoney, 2011). Since the economic and political stability of Tier 1 countries is strong therefore Telecity Group plc does not face any significant risk with respect to its operations in these countries. Similarly, Tier 2 countries also do not pose significant risks due to their strong political and economic structures (Euromoney, 2011). However, the political and economic weaknesses in Ireland and Italy pose risks to some extent for the company’s operations.

AMB, another rating agency, has also placed Italy and Ireland below the other five countries in which Telecity operates (AMB, 2012). Both these countries have been facing strong political and economic challenges since 2010 and the debt crises faced by the countries have certainly led the governmental policies and regulations to be less favorable for businesses operating in the country (Euromoney, 2011).

Ireland has faced financial challenges since the economic disruption in the European region. Since the country has endorsed Euro as its exchange medium, the weakening of the Euro has placed a direct impact on its economy. The government of Ireland faces strong fiscal challenges and has in turn followed an aggressive fiscal policy so as to deter the pressure created by the debt crisis and to remain active in international capital markets (AMB, 2012).

Although Italy has an edge over other European counterparts with its large manufacturing economy, however, the country has lost competitiveness in the wake of the debt crisis (Hornby, 2012). As noted in the AMB’s country assessment report, apart from a well-supporting business infrastructure, there are still structural issues in the country’s economy which are preventing it from attaining the benefits of its potential. The country has higher taxation rates in the region and unemployment and crime rates have also contributed to increased political risks.

Apart from these issues, the overwhelming proportion of public debt, i.e. 120 percent of the country’s GDP, has brought immense pressure on the overall economy (AMB, 2012). The present government has made efforts to bring down this extremely high level of public debt but has not proved to be effective enough (Hornby, 2012). For Telecity Group, these issues are certainly important to consider while taking into account the spread of its operations in the country.

There are no express policy statements issued by Telecity Group plc as to how the company manages the political and country risks; however, the fact that the company has segregated its overall operations in seven different countries, is in itself a strategy to avoid risks. There are certain risk management strategies, however, which the company follows to avoid risks like strategic, operational and financial risks. From these strategies, it can be noted that in order to avoid any risks emerging from changes in regulatory frameworks in particular countries, the company works closely with the regulators so as to remain informed about the changes taking place. As discussed earlier, in countries where there are political and financial risks Telecity Group tends to mitigate these risks by way of continuously analyzing the m (Telecity Group, 2012).

Weaknesses in Risk Assessment Framework

The risk assessment framework of the company includes risk identification and evaluation related to three broad areas, which include operational risks, financial risks and strategic risks. However, there are no specific statements or evaluation procedures which evaluate the risks related to foreign currency exchange rates fluctuations and country and political risks.

Recommendations for Addressing Exchange Rate Risks

In order to address the fluctuations in foreign currency exchange rates, there are various strategies that can be followed. First of all, it is important to consider that the company operates in the European region and therefore it incurs a significant amount of transactions in Euro. During the past few years, Euro has been volatile and it is further expected that the currency will go down further before the countries like Italy, Ireland and Spain are able to pull themselves out of the debt crisis. Keeping in view these circumstances, it is recommended that Telecity shall limit its Euro transactions to a certain degree and continue following a multi-currency investment approach as it is doing now. Moreover, it is also recommended that the company shall translate its transactions in weaker currencies into stronger currencies.

Apart from this, it is also recommended that if the evaluation and forecasting of future exchange rates are not in favor of the company, then it shall hedge its risk. In addition to this, another recommendation, which is a common strategy to avoid exchange rate risk, is to open up foreign currency accounts in which payments are made and received in a particular currency.

Recommendations for Addressing Country and Political Risks

As far as Italy is concerned, Telecity Group shall consider the delayed payment terms being followed in the country, which is longer than that of the UK and range between 60 to 120 days. Keeping in view the risks associated with the operations in the European region due to the weakening Euro, the company shall focus on introducing multi-currency investments and funding, which will ensure that the company is not exposed too much to Euro and is thus less reliant on its stability.

Lastly, as noted in the weakness in the risk assessment framework, the company shall develop certain policies to evaluate and address country and political risks in the countries in which it operates. In this regard, it is recommended that the company shall develop a risk assessment index to monitor the risks associated with particular economies in which Telecity Group has certain stakes.

List of References

AMB, 2012. AMB Country Risk Report: Ireland. Country Risk Report. Oldwick: AMB AM Best.

AMB, 2012. AMB Country Risk Report: Italy. Country Risk Report. Oldwick: AMB AM Best.

Bloomberg Businessweek, 2012. Telecity Group Plc (TCY:London). Web.

Euromoney, 2011. Countries included in the Euromoney Country Risk Results. Web.

Hornby, C., 2012. Key Political Risks to Watch in Italy. The Daily Star.

Telecity Group, 2012. Annual Report. Financial Statements. London: Telecity Group.

Telecity Group, 2012. Board of Directors. Web.

Telecity Group, 2012. Principle Risks and Uncertainities. Web.

Telecity Group, 2012. Telecity Group acquires leading Finland data centre operator Tenue Oy. Web.

Yahoo Finance, 2012. Telecity Group PLC (TCY.L). Web.

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