Telekom pushes for dominance in CEE - Deutsche Telekom; central and eastern - Europe - Company Operations

CommunicationsWeek International, July 17, 2000 by Emma McClune

After a year of consistent spending, Deutsche Telekom is making significant inroads into central and eastern Europe.

The German operator is now stealing a march on its main international competitor in the region, KPN Telecom NV. The playing field was fairly level a year ago, but this is changing as Telekom pursues a string of important Czech acquisitions and ramps up its investment in Hungary and Slokavia.

"A couple of years ago Deutsche Telekom held just bits and pieces of this and that," said Charles Holland of Marklndentit Consultants in Budapest. "What we're starting to see now is a solid corporate presence in both fixed and mobile which will allow DT to dominate the region in the coming years."

Major deals

The German operator has just clinched a deal to gain complete control of 59.53% of Hungary's fixed-line incumbent Matav Rt. for $2.2 billion, as well as an [epsilon]1 billion deal to buy 51% of Slovenske Telekomunikacie AS, Slovakia's state-owned, fixed-line operator.

But despite owning some interests in Poland, Telekom has yet to make any serious headway in this important market, which analysts say could be the weak link in its chain of regional holdings.

According to Tomas Schollaert, telecoms lawyer with Linklaters & Alliance in Brussels, Deutsche Telekom has been following an aggressive expansionist strategy in central and eastern Europe that has left competitors gasping for breath.

"Certainly I've seen them bidding on almost everything that moves in the region," Schollaert said, adding that some of these bids have heavily outweighed the others. For example, in the first round of this year's tender for a 51% stake in Prague's alternative telecoms operator PragoNet, Telekom's bid was more than double PragoNet's estimated value of $9 million-$11 million. The German operator finally secured the deal at $25 million.

Telekom is also rumored to have dug deep for the upcoming tender for 51% of the second-largest Czech telecoms operator Ceske Radiokomunikace, scheduled for 21 September, for which it is touted as the favorite. If successful, Telekom would become the main competitor to the monopoly Cesky Telecom after the market is liberalized in 2001, said Schollaert.

Telekom already holds a major interest in Radiokom's mobile unit RadioMobil through the international consortium C-Mobil, which recently raised its stake in the mobile operator to 60.8% from 49%. Telekom owns 84.5% of C-Mobil.

This, together with the company's majority stake in Hungary's Matav, which holds both the local mobile and fixed market in an iron fist, would bring at least two of the region's markets within Telekom's sphere of dominance, said Dalibor Vavruska, an analyst at ING Barings in London.

And after winning the bid for Sloyak Telecom, the German giant is now able to draw a geographical line between its assets in the Czech Republic through Slovakia, Hungary and down to Croatia, where Telekom holds 35% of the fixed-line incumbent.

According to Moritz Gerke, executive vice president and head of the central and eastern European regions at Deutsche Telekom, these emerging markets are "one of the cornerstones" of the German company's European strategy, adding that its strategy in this region does not significantly differ from its expansionist strategy in western European markets. But analysts suggest that CEE is more important to Telekom than the company admits.

"You can be sure there is a grand plan behind all this spending," said MarkIndentit's Holland. Geographical proximity to the region suggests the company is expanding eastwards with the aim of creating a tight Telekom-led bloc, he added.

But the future weak link in Deutsche Telekom's regional chain will most certainly be Poland, analysts say. Although Telekom owns important stakes in the local number two mobile operator Polska Telefonia Cyfrowa, it decided not to bid for a 35% stake in the fixed-line giant Telekdmunikacja Polska SA (TPSA), which was awarded earlier this year to France Telecom. KPN, however, has no presence in Poland.

All agree that KPN is Telekom's most serious contender for regional supremacy. In Hungary, KPN owns a 75% stake in the alternative fixed-line operator PanTel and 44% of mobile operator Pannon GSM. In the Czech Republic, the Dutch operator still dominates with a minority stake both in Cesky Telecom and its mobile arm, EuroTel Praha S.T.O.

It is rumored that KPN and Telekom will go head to head over Cesky Telecom when the government sells its 51% stake, even though the German operator is already bidding for Radiokom.

According to Peter Karli, an analyst at Wood & Co. of Budapest, Telekom's next target in the CEE region is likely to be Internet service providers, although no definite offers are on the table as yet