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East Europe: Telecom Timed Privatizations Badly

Prague, 20 October 1998 (RFE/RL) -- East and Central European governments that have delayed the privatization of their state telephone companies are discovering they have far less bargaining power than those which quickly completed the sell-offs.

Compared to the competitive bidding seen in Hungary and the Czech Republic during the mid-1990s, there now is relatively little interest in the state telecoms of Russia, Poland, Romania, Bulgaria and Moldova. Officials in all those countries are learning the hard way that timing is everything in the telecom sector. And by most measures, the timing of current sales is bad.

First, a global trend of privatizations in recent years has brought a glut of telecom shares to the international market. Then, at the beginning of this year, the European Union's introduction of full market liberalization among its 15 member-states exposed European telecoms to greater risks.

That is because the elimination of protective barriers brought down prices for phone users in the EU by increasing competition in the sector. The squeeze on profits has made many European telecom executives more conservative about fresh investments. Recent economic crises in Asia, Russia and Latin America have made them even more wary about pouring money into emerging markets.

On the Warsaw Stock Exchange yesterday, Poland began selling a 15 percent stake in the national phone company Telekomunikacja Polska (TPSA). The three week sale will test the reasoning of officials who delayed privatization years ago, arguing that it was a bad idea to bring in a foreign strategic investor during the early stages of economic transition. They warned that valuable assets would be sold off cheaply to the first comers. They said the national phone system could be developed faster by the state, and that their strategy would mean a higher sale price in the end. Events could prove them wrong.

Three years ago, the Czech Republic sold a 27 percent stake in SPT Telecom to a consortium that includes Switzerland's Swisscom, Sweden's Telia and Holland's KPN. The capital invested by the consortium already has helped double teledensity in the country from 16 lines per 100 people to 32 lines. With the financial backing of its foreign partners, SPT expects to have put more than $4.2 billion into the phone system by the end of next year.

Hungary's teledensity has reached 34 percent and line growth is continuing at an annual rate of 13 percent -- putting the country on track to reach the Western European average of 50 lines per 100 residents. Those improvements are being led by Deutsche Telekom and Ameritech, who have invested heavily in the system since buying 67 percent of the former state monopoly MATAV.

By comparison, Poland has had relatively little money to fund badly needed improvements for TPSA. Teledensity in Poland's urban areas is still about 20 lines per 100 people. In rural areas, it is only 14 percent. Customer service and billing systems also have a long way to go before the national phone service can support the massive demands that have come with the growth of private business.

Warsaw hopes the 15 percent stake of TPSA will raise as much as $1.1 billion on the Warsaw exchanges and international capital markets. But the sale method means the price will ultimately depend on demand.

Urs Anttonioli, of the emerging market fund UBS Brinson, said yesterday that he doesn't expect a great demand for TPSA. He describes the firm as three years behind companies like MATAV in terms of line penetration, productivity and digitalization.

Waldemar Begus, head of portfolio management at Pioneer Securities Co., said his firm won't make a decision on buying until his analysts have more time to observe demand outside of Poland. In his words: "There is too much volatility abroad, influencing the Polish market, to make such serious decisions at the moment.

Telecom analyst Philip Townsend, of Paribas Capital Markets in London, says the current situation in global markets means that Warsaw should be pleased to sell the shares at the lower end of the government's target price range.

Recent investments made by the state have not made the Polish telecom much more attractive. Selling on the stock exchanges also will not bring in a strategic partner to help restructure the company in a way that will make it more competitive and better able to handle improvements. In an apparent admission of the need for a strategic partner, Poland announced last week that it plans to sell an additional stake in TPSA to a strategic investor --probably a foreign telephone company.

The Russian financial crisis has forced Moscow to further delay its planned sale of a 25 percent stake in the Svyazinvest telecommunications holding company. That stake originally had been priced at some 6,500 million rubles. But the dramatic fall of the ruble in August reduced the asking price, in terms of hard currency, from about $1 billion to only about $410 million. The Russian Federal Property Fund said last week that the government does not plan to reopen the tender this year.

Meanwhile, foreign investors are wondering if the firm is worth what Moscow has been asking. As a holding company, Svyazinvest owns majority stakes in almost all of Russia's 88 regional telecoms. It also owns a majority of Rostelecom, Russia's monopoly long-distance and international operator. But new share issues by the regional telecoms have diluted Svyazinvest's stake to the extent that it now commands less than 40 percent of the Russian telephone market. With all of those subsidiaries being separately quoted and managed, potential investors who visit Svyazinvest see nothing more than a small Moscow office with fewer than 100 employees.

In Romania, there had been up to seven companies interested in a 35 percent stake of RomTelecom earlier this year. But the terms of that deal have been changed and the tender delayed so many times that five potential buyers have pulled out of the process --including Deutsche Telekom, France Telecom, the U.S.-based SBC and Holland's KPN. That leaves only Italy's STET and Greece's OTE, and both of those firms originally had planned to participate only as minor partners in competing consortia. Both are now looking for a new partner.

Romanian Communications Minister Sorin Pantis told RFE/RL recently that it is possible that OTE and STET might team together as they did last year for a 49 percent state of Serbia Telecom. But Pantis said he doesn't think such a partnership is likely in Romania.

The departure of so many interested buyers leaves Bucharest facing a possible repeat of Moldova's recent unsuccessful tender for Moldtelecom. Chisinau canceled its auction this year after the only bidder, Greece's OTE, failed to offer the minimum asking price.

(First of three features on developments in the telecommunications sector in Central and Eastern Europe.)