SCMWY Swisscom AG (PK)

Swisscom AG (SCMN.VX) expects the weak Euro to continue to weigh on the performance of its troubled Italian subsidiary Fastweb in 2011.

The decline of the Euro versus the Swiss Franc turned Fastweb's 1.5% sales gain for 2010 into a 7.8% decline after it was converted into Francs, Swisscom's reporting currency.

Sales at Fastweb, which Swisscom bought outright in March, rose to EUR1.88 billion in 2010, from EUR1.85 billion a year earlier, but fell to CHF2.58 billion from CHF2.79 billion as the average franc-euro exchange rate fell 9.1% during the year.

Italian broadband and mobile phone provider Fastweb is important as it is Swisscom's largest acquisition outside of Switzerland and is responsible for around 21% of Swisscom's CHF11.99 billion sales.

"The Euro will continue to be a drag. We expect the average Euro rate to be lower than last year," Chief Executive Carsten Schloter told Dow Jones Newswires.

"But this is not something we can do anything about. At some point the Euro will strengthen against the Swiss Franc and then it is artificial growth."

He said 2011 would be a year of transition for Fastweb, with stable revenue but slightly higher operating profit.

During 2010 operating profit declined to EUR433 million from EUR551 million due to increasing competition in Italy and a EUR70 million provision to cover an ongoing investigation into alleged VAT fraud.

When converted to Swiss francs, 2010 operating profit fell to CHF589 million from CHF831 million in 2009.

"Fastweb will improve its operating results this year because of better bad debt management and better cost control. We expect it to return to the growth path of profit this year," Schloter said.

The experience with Fastweb has not put Swisscom off making further acquisitions in Italy, he said.

"We have invested in the Italian market and having made the first step, it would be wrong to exclude further small steps if they help to improve market position, but it's not going to be something big."

Outside Italy and Switzerland, Swisscom has no ambitions for acquisitions, Schloter said.

"Other markets are going for consolidation, so now is not a moment to enter other markets except Switzerland and Italy," he said.

Instead Swisscom will look at small acquisitions in the CHF20 million to CHF30 million range, particularly to fill the gaps in its IT services division.

He added that he was confident an agreement would be found with the Swiss Competition Commission which is currently investigating Swisscom's agreements with local utility companies to extend the fiber optic network in Switzerland.

If the watchdog finds the agreements to be anti-competitive, it could halt a joint venture in Fribourg, and in six other cities advise Swisscom on future action it should take if it has concerns has concerns over competition.

The outcome of this preliminary inquiry is expected in the summer, with the potential for a full investigation and fines in the future if Swisscom is found to be anticompetitive.

"We have to find ways that offer a proper compromise between our investment protection and their concern over competition," Schloter said.

"It must be possible to find a compromise. I am confident we will find a way to move forward and not have any negative consequences on the building of the network and our investments."

He maintained Swisscom's guidance for full-year net revenue of at least CHF11.8 billion and operating profit of more than CHF4.6 billion.

He declined to say how 2011 had started so far.

"Up to now we have had no fundamental disruptions like we did in 2010," Schloter said.

Swisscom reports its first quarter 2011 figures on May 4.

-By John Revill, Dow Jones Newswires; +41 43 443 8042 ; john.revill@dowjones.com

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