Telekom-backed Matav takes mobile lead - Matav buyes Hungarian assets of MediaOne deal from Deutsche Telekom - Company Business and Marketing

CommunicationsWeek International, Nov 15, 1999 by Emma McClune

Hungarian operator Matav has taken advantage of the financial clout of strategic partner, Deutsche Telekom, to buy two leading mobile operators.

My brother's success is my success--so goes the age-old Hungarian adage. Witness the latest trickle-down share deal in which Matav Rt. acquired full ownership of two leading local mobile companies from its strategic partner, Deutsche Telekom, in what some analysts are calling the bargain of the year.

Last month, Deutsche Telekom signed a $2 billion contract with MediaOne Group Inc., of Denver, Colorado, for part of its mobile portfolio in Hungary, Poland and Russia. Lauded as the biggest deal of its kind in Central and Eastern Europe, the acquisitions seemed to hoist Deutsche Telekom into a commanding regional position.

Friendly price

Then, just one day later, Matav, the Hungarian state fixed-line monopoly, announced it had secured an option to buy out the Hungarian assets of the MediaOne deal from Deutsche Telekom within a 15-month period starting next July. Deutsche Telekom, which owns 59.5% of Matav in a consortium with Ameritech Corp., of Chicago, set a more-than-friendly price of $88.5 million for the remaining 49% stake of both Westel 900 GSM Rt. and Westel Radiotelefon Kft.--often referred to as Westel 450 on account of its megahertz frequency--both based in Budapest.

Matav, which already owns a 51% stake in both, will assume full ownership and full management of both as soon as the contract between Deutsche Telekom and MediaOne is finalized at the beginning of next year.

Soaring market

According to Mathew Peers of Raillings Consultancy Inc., of Budapest, Deutsche Telekom clearly bought the Hungarian shares from MediaOne with the intention of handing them straight over to Matav. "On the surface it seems to be a very generous gesture," he said. "But Deutsche Telekom is one of the most strategic companies in the world. You can be sure they are looking after their own interests."

Matav has acquired sole ownership of the mobile leader just as the market looks set to soar. And, pointed out John Barnett, telecoms analyst at Raiffeisen Securities and Investments in Budapest, through its stake Deutsche Telekom retains a strong interest.

According to Peers, at just 13.5% penetration, the Hungarian market grew slower than its regional counterparts. "Growth in Poland and the Czech Republic in the '90s was explosive. We're looking out for a similar explosion [in Hungary] somewhere in the first decade of the next century," he said, predicting a penetration rise to 20% by the end of next year.

And a recent report from the International Finance Corporation, a part of the World Bank Group, predicted mobile penetration in Hungary could grow to 35% by 2003. Barnett added that mobile penetration could exceed the rate of fixed-line penetration growth in Hungary from 2010-2015, with fixed-line growth slowing down after reaching 40% next year.

The financing of the deal is very much in Matav's favor, said Barnett. "At the moment it would hurt Matav's earnings per share to finance the purchase itself, and they would have to finance it through hard currency debt. The local currency rate is very high, and the florint still devalues at around 5%-6% annually against hard currency."

Acquiring the shares through a western partner meant Matav could get someone else to put the purchase on their books in Euros, he added.

Barnett said Matav emerges the hands-down winner. Westel 900 dominates the mobile market with 60% market share and over 750,000 subscribers. Its analog cousin, Westel 450, has 99,000 subscribers.

And he reckons the deal should add approximately 19 billion florints ($78 million) to Matav's earnings in the first year by raising its share of mobile income from 18% to 25% of total net income.

"It does seem to be a complicated way to acquire shares, but it's all above board," said Peers.