Vivendi ups funding in loss-making Elektrim - Vivendi SA Elektrim SA - Company Business and Marketing

CommunicationsWeek International, Dec 13, 1999 by Emma McClune

French telecoms company Vivendi has doubled its investment in Elektrim, after the acquisitive polish operator suffered heavy debts and losses.

French conglomerate Vivendi SA last week came to the rescue of Poland's Elektrim SA by doubling its investment in the cash-strapped engergy and telecoms company and reasserting its commitment to a partnership between the two.

Elektrim was forced to re-examine both its future market strategy and choice of potential strategic partner last month following a string of bad financial reports. Its problems were further heightened by a tussle involving Vivendi and Deutsche Telekom over shares in mobile operator Polska Telefonia Cyfrowa SA (PTC), in which Elektrim holds a majority.

According to Elektrim sources, Vivendi has pledged to increase its investment with the polish operator to $1.2 billion to help solve Elektrim's pressing liquidity problems, thereby upping its stake in a joint venture between the two to 49%.

By anyone's standards 1999 was an expensive year for Elektrim, of Warsaw. U.S.-born chief executive Barbara Lundberg took the helm at the start of the year and initiated a series of telecoms deals in a bid to become the major rival to TPSA. Then in June, Elektrim published a prospectus announcing a $440 million debt issue and setting out its need for $1 billion to service its 1999 acquisition commitments-a figure well above its then $900 million market capitalization (see box).

The first evidence of real trouble came in mid-November when Elektrim posted a $410 million short-term debt, a nine-month loss of $52 million and record high financing costs to the tune of $72.25 million in the previous six months.

But according to Rafal Gebicki, head analyst with Raiffeisen capital and Investment Polska SA, of Warsaw, Elektrim did not necessarily bite off more than it could chew. "If you look at the U.K. or French market, you'll see other operators with very aggressive acquisition policies. TPSA is a monopoly and the only way to compete was to buy up as much as possible," he said.

Zbigniew Lapinski, analyst with Deutsche Bank in Warsaw, agreed that Elektrim's acquisition policy was "basically sound." "It's understood that telecoms is a loss-making venture, but investors invest because of the long-term growth potential," he said.

Following the poor financial figures, some of Elektrim's minority shareholders approached Deutsche Telekom to become a strategic investor. But at the end of last month the German operator announced that it had no interest in becoming a strategic partner in Elektrim.

The developments appeared to put Elektrim's expansion plans on hold, as it announced that it would not, after all, put in a bid for one of three new long-distance licenses to compete with national fixed-line monopoly Telekomunikacja Polska SA (TPSA).

"I expected Elektrim to enter the tender and be one of the winners," said Gebicki. But he added: "There are some rumors that the tender will not be as profitable as expected." There could be too many competitors for revenues to be significant, and regulatory details on interconnection to TPSA's network to offer long-distance services are still unclear, he said.

The analysts agree the problems escalated after a share-transfer issue involving Vivendi and Telekom. Earlier this year, Elektrim Persuaded Vivendi to invest $615 million in the newly established telecoms subsidiary, Elektrim Telekomunikacja, in which the French operator would hold 30%, with Elektrim owning the remaining 70%. The deal was made with the condition that Elektrim would secure a majority 51% stake of PTC -one of three GSM operators in Poland, with the Era GSM service--and transfer the shares to the newly formed subsidiary.

In the small print of the deal Vivendi insisted that should Elektrim fail to secure 51% ownership this initial investment would turn into a loan, with a 10% annual inflation tag from 30 December.

At the time of the deal this transfer seemed to pose few problems, since Elektrim already owned 34% of PTC. The stumbling block, however, was to be Deutsche Telekom, which at the time held 22.5% of PTC but in October doubled its stake to 45% through the purchase of the east European mobile interests of MediaOne International Inc.

Then, early in November, Deutsche Telekom protested the transfer by Elektrim, claiming it should have had first refusal to buy the shares. Although the Polish courts rubber-stamped Elektrim's share purchase, Telekom blocked the share transfer to Elektrim Telekomunikacja using its two seats on PTC's supervisory board.

"Technically, Elektrim has the 51% stake it needs to satisfy Vivendi's requirements," said Lapinski, "But DT is questioning that and it now wants to go to the upper court." Elektrim last week said it was considering a counter suit.

"I think Deutsche Telekom will now find it hard to partner with anyone here in Poland after the way they've treated Elektrim," said Bob creamer, analyst at Raiffeisen capital. "Elektrim are still in a very strong position. They may have terrible debts, but they still control the GSM sector."