Sommer banks on Eastern Europe

CommunicationsWeek International, April 1, 2002 by Emma McClune

Even as financial woes deepen for Deutsche Telekom, the German incumbent is set on testing a new acquisition "parking model" to strengthen its foothold in central and eastern European markets as other incumbents pull out.

As Vivendi Universal, KPN and Denmark's TDC speedily exit the region, Telekom is planning to expand further into the region, despite investor warnings against such a move.

Telekom will attempt to park assets with equity houses and banks, which would in turn agree to options allowing the operator to regain control of these stakes at a later date, claim industry sources. Deutsche Bank is rumored to be a key partner in Telekom's new expansion financing model.

"What we're seeing here is a new model," said Hannes Wittig, telecoms analyst with Dresdner Kleinwort Wasserstein in London, adding that European incumbents could soon follow Telekom's parking strategy. "Although it's still not clear if investors will allow them to do that."

Other operators are signalling a new detente with the banks. Last week, mobile operator Orange, owned by France Telecom, announced a deal with banks and equity houses on a similar parking arrangement for control of Germany's MobilCom.

But by parking acquisitions off an already overladen balance sheet in this way, Telekom chief executive Ron Sommer could risk damaging increasingly skeptical investor confidence further.

"I don't really think the mood is [to let] these operators to go out and shop," said Dan Bieler, senior equity analyst with Credit Lyonnais in London.

A senior Telekom executive claims that investors have already warned Sommer to halt all expansion plans until further notice. At the recent CeBit Investors' Day. Sommer repeatedly promised to take prudence as a guiding principle in considering expansion opportunities.

"He's been told to stop [all acquisitons], but there's a lot on the line right now," said a senior Telekom source who requested anonymity.

But Camille Mendler, fixed-line telecoms analyst with Yankee Group in London, warns that Telekom will have to play its future acquisitions card carefully or risk serious investor backlash.

"If you think about what has happened to BT lately, DT and [France Telecom] have gotten off pretty lightly," she said. "The question is, will investors now make [Telekom] go down the same route as BT, selling off and spinning off as they go in order to retrench to the home market?"

Nevertheless, central European analysts confirm that Deutsche Telekom is still the front runner to take significant stakes in both Czech Telecom and Telekom Austria this year.

"I haven't seen or heard anything to suggest that [Telekom]'s position has changed over the last few weeks," says Jindrich Svatek, telecommunications analyst with Raiffeisen Capital & Investment Praha. "In my view [Telekom] is still the [Czech government's] favorite," he added.

And Telekom could also use banks and equity houses to help consolidate its shares in mobile operators Ukrainian Mobile Communications (UMC) in Ukraine and Polska Telefonia Cyfrowa (PTC) in Poland.

"It's sort of like putting a 'sold' sticker on a house and paying for it later," said Credit Suisse's Bieler. "Right now, there's not much the operators can do themselves. It's a way to make a claim on an interesting business," he said.

Telekom is also reportedly in negotiations with UMC's holding company to acquire a further 25%. UMC's other investors, Denmark's TDC and Dutch KPN, have both indicated they are also ready to sell their stakes.

Sommer told investors at last month's CeBit that the operator was "not thinking of pursuing the opportunity" presented by Vivendi Universal's exit of Poland's Elektrim Telekomunikacja. Buying Vivendi's share could allow the German incumbent to consolidate its stakes in PTC. But Telekom may be forced to act quicker in this case than it would like or risk losing the opportunity altogether: Polish corporate bank BRE recently announced it would be prepared lead an equity house consortium to buy Vivendi's stakes--worth an estimated $530 million--with a view to a later resale. Citibank Group, an investor in Telekom, is also rumored to be preparing a bid for the stakes.

Telekom's international strategy also faces fire from the U.S. According to one U.S.-based lawyer who requested anonymity; U.S. Senator Ernest Hollings is preparing to take a third swipe at Telekom's VoiceStream Communications merger. Last year, Hollings led two failed bills that attempted to ban mergers between U.S. communications entities and foreign operators with a foreign government ownership of 25% or more.

"[Hollings] is still committed and feels very strongly about this, but we don't know what steps he'll take next to press the issue," said a Hollings aid.

"Hollings never forgets, and he never gives up," said another lawyer close to the VoiceStream merger. "He will continue to raise problems and he will no doubt use the current climate to his advantage," he warned.

Hollings' support is certainly not universal, though. "This is a bad bill...for U.S. consumers...and for U.S. telcos," said Mark Naftel, a telecoms lawyer in Nashville, Tennessee. "This bill on its face appears to violate the U.S. commitment in the WTO Telecoms Treaty to open its markets. I find no exception in this Treaty for government controlled telcos. The U.S. pushed hard for this Treaty, but some congressmen do not appear to want the U.S. to live up to its terms."