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Czech Republic: Is Selling Telecoms Firm Two Years After Boom Is Over A Bad Call?

  • Mark Baker

The Czech government on 7 August finally decided to sell a majority holding in Cesky (Czech) Telecom, the country's main telephone company. The Czechs waited two years on the deal, but the timing could not have been worse. Valuations for telecoms companies have plunged since the boom privatization days of the late 1990s and 2000. Analysts say the Czechs could not afford the risk that prices would fall even lower.

Prague, 9 August 2002 (RFE/RL) -- The Czech government this week decided to take the money now rather than risk further price falls in selling a majority stake in Cesky Telecom, the country's former monopoly telephone operator.

The Czech government on 7 August said it accepted an offer from Germany's Deutsche Bank and the Danish telephone operator TDC of $1.8 billion for a 51 percent share of the Czech company.

The amount was far less than the government had hoped. As recently as the spring, officials had said they were optimistic the sale could fetch as much as $2.5 billion or more.

Cesky Telecom has around 4 million subscribers for its fixed-line telephone services. It also has a controlling stake in Eurotel, the Czech Republic's leading mobile phone company with around 3.5 million subscribers.

Benedict Evans, a telecoms analyst at the financial services group West LB Panmure in London, says the Czechs missed their chance two years ago when Western European and American companies were paying top dollar for telecom operators in Eastern Europe.

"They missed the top of the market and decided that they'd like to 'have the money now, thank you.' Presumably, the people in the Czech Republic are no longer anxious about the Germans, and they didn't have a problem selling their stake to Deutsche Bank," Evans said.

The late 1990s and 2000 saw a wave of telecoms privatizations in Eastern Europe and the former Soviet Union. The deals were seen as a win for all concerned -- giving the Western telecoms operators a presence in the East while giving a boost to Eastern European budgets. Consumers benefited from better service.

Deals involving Lithuania and Romania were typical for the time. In 1998, a Swedish-Finnish consortium agreed to pay around $500 million for a majority share of Lietuvos Telekomas (Lithuanian Telecom). In Romania that year, Greek telecoms operator OTE acquired a stake in Romtelecom for $675 million.

But the prices paid for these types of acquisitions quickly escalated as Western telecoms companies -- caught up in the frenzy of trying to build international networks -- raced to outbid each other. It appeared no price was too high, and countries like the Czech Republic decided they could delay selling to maximize the price.

In mid-2000, at the height of the frenzy, France Telecom beat out an American company for the right to buy a minority stake in Poland's TPSA for a record $4.3 billion, or about 12 percent of Poland's entire budget.

Dalibor Vavruska, an analyst with ING Financial Markets in London, said that, in addition, France Telecom agreed to buy additional shares in the future at the original purchase price. What they didn't count on was that the value of their investment would plunge.

"In fact, they signed this option agreement, which would force them to buy a huge additional stake in that company for, in fact, the original purchase price, whereas the stock price has fallen to one-third of it or something," Vavruska said. "So, you know, they will be forced to lose something in the range of $1.5 billion in the time period of one or two years."

This week, the Czechs could only dream of signing an agreement as favorable as the one Poland got. The boom days are long over.

In fact, Western European giants like France Telecom and Deutsche Telekom are saddled with debt, the result of overpaying for acquisitions and licenses to offer advanced mobile-phone services. These services -- such as accessing bank accounts and the Internet from a mobile phone -- have been slow to catch on with consumers, and now many companies are writing off their licensing investments as worthless.

Vavruska summed up the situation like this: "[The] one or two major players that are active in Eastern Europe, and which were supposed to be active in the near-term future, Deutsche Telekom and France Telecom, are in an urgent need to solve their own balance sheet problems."

West LB's Evans said Deutsche Telekom, in particular, is an excellent example of a "binge eater" in the 1990s that is now on a strict diet. Deutsche Telekom was an early bidder for the stake in Cesky Telecom but was forced to back out. With debts of around $65 billion, the company couldn't afford it.

"They [Deutsche Telekom] haven't got any money. [Laughs.] That's their problem. They're still trying to keep...stay in ...their Eastern European mobile. But they're not really in the mood to splash a couple billion [dollars] around to buy a boring fixed-line business [like Cesky Telecom]," Evans said.

The Czech agreement must still be approved by regulators and hinges on whether other foreign holders of Cesky Telecom, including Switzerland's Swisscom and KPN of the Netherlands, agree to sell their stakes to the new buyers. Officials hope to wrap up the details by the end of the year.

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