Investors stay on the line for Balkan telcos

Investors stay on the line for Balkan telcos
By Clare Nuttall November 19, 2015

Six bidders are competing for Telekom Srbija, which will be the second telecommunications incumbent from the Western Balkans to go on the block this year after a failed attempt to sell Telekom Slovenije in August.

That has been the pattern for attempts by governments across the former Yugoslavia to privatise their incumbent telecom operators. With the exception of the 1999 sale of Croatia’s Hrvatski Telekom to Deutsche Telekom, auctions have typically failed to attract bidders, been cancelled, or – where transactions have actually gone ahead – later been investigated for corruption and a lack of transparency.

This dismal record is despite the fact that in general telecom companies are considered attractive targets for privatisation by both strategic buyers and private equity firms, as shown by the earlier wave of investment into telecom firms across Emerging Europe.

However, investors are not yet ready to hang up the phone on potential telecom deals in Southeast Europe. Serbia’s minister of trade, tourism and telecoms, Rasim Ljajic, told a talkshow on RTV Vojvodina on November 16 that six bidders are still in the running for the government’s 58.11% stake in Telekom Srbija after one interested party dropped out.

Ljajic declined to disclose the names of the bidders, but said that privatisation adviser Lazard Freres would analyse the bids over the coming fortnight and rank them, with price being the primary consideration, though also taking into account the bidders’ proposed social and economic programmes for the company.

Both Ljajic and Prime Minister Aleksandar Vucic say they will not go ahead with the sale unless an adequate price is offered. That is reminscent of the previous attempt to sell Telekom Srbija, which fell through in 2011 when the sole bidder Telekom Austria offered just €1.1bn, well below the €1.4bn sought by the government.

Erste senior equity analyst Mladen Dodig points out that Serbia’s ministries of finance and economy still have to decide on the exact model for the privatization, which “allows the government a certain degree of balance between valuation and the country risk” that the bidders feel. “In the absence of the valuation report by the current privatization adviser, current sentiment indicates that the equity valuation is lower in comparison to the previous tender,” Dodig tells bne IntelliNews. “Also, the latest unions’ protest against the sale of the company doesn’t make the whole process easier.”

Members of the two unions representing Telekom Srbija workers staged a protest against the privatization on November 11 with around 2,300 people taking part. Many Serbian citizens have also spoken out against the planned sale, as has the independent Anti-Corruption Council.

Ljajic admitted on November 16 that layoffs are expected. Telekom Srbija employs around 9,000 people in Serbia and a further 4,000 in Bosnia & Herzegovina and Montenegro. Over-staffing is common in Serbian companies slated for privatization, and is a particular problem at Telekom Srbija.

Belgrade is hoping that the buyer will invest into raising Telekom Srbija’s competitiveness. Its mobile division, mts, holds a 44% market share in Serbia, but has been losing ground to Telenor, the local arm of the Norwegian incumbent. Telenor has gained market share by pioneering mobile banking services on the Serbian market following its acquisition of KBC Banka in 2013.

Under these circumstances, Dodig forecasts that, “future capital expenditures and the social programme for workers (especially redundant ones) would have significant weights when the government starts to evaluate binding bids.”

Russian mobile operator Mobile TeleSystems (MTS) is believed to be among the bidders after its CEO Andrei Dubovskov confirmed its interest in Telekom Srbija to Russian news agency Tass in June. A meeting has also taken place between Serbian government officials and representatives of state-owned China Telecom, Tatjana Matic, state secretary at the trade, tourism and telecommunications ministry, told local media on November 4.

Several private equity firms including Advent International, Mid Europa Partners and Novator Partners – all of which have invested in CEE telecom deals – are also reported to be interested in Telekom Srbija. 

Finally, Telekom Slovenije is reportedly bidding for its Serbian peer alongside US private equity firm Apollo Global Management. On November 12, Slovenian news agency STA quoted a well-placed source as saying that Apollo was submitting a bid with the Slovenian telecom operator as its partner. This follows a solo bid from Telekom Slovenije in the first round of the auction process. Combining the two former incumbents would create the largest telecom operator in the region, overcoming one of the main deterrents to investors, namely the small market size. Serbia is the most populous of the former Yugoslavian republics with a population of 7.1mn, while the smallest Montenegro has just over 600,000 inhabitants.

Setting the tone

Telekom Slovenije is regrouping after Ljubljana’s failed attempt to sell it to UK private equity firm Cinven earlier this year. In addition to the bid for Telekom Srbija, the Slovenian company also completed its acquisition of domestic mobile operator Debitel in October.

However, a letter sent by Cinven to Slovenia Sovereign Holding (SSH), which is managing the country’s privatization process, highlighted the other challenges for telecom investors in the region. Cinven cited the “highly uncertain business environment” in which Telekom Slovenije operates, in particular the “complex” political environment and strong public opposition to the sale, according to an August 4 statement from SSH.

Similar factors are present in the Serbian market, where Erste’s Dodig says that “the failure of the Telekom Slovenije tender just might set the tone for the bidders for its Serbian peer,” though he adds that “every privatization has its own specific details.”

A third Balkan operator could be up for sale soon, as the privatization of Bosnia’s BH Telecom was included in the country’s Reform Agenda for 2015-2018 – a wide-reaching reform package intended to support Bosnia’s progress towards EU accession.

This would be the second attempt at a sale of 90% state-owned BH Telecom after the first was scrapped in 2009. Previously, Bosnian politicians had been reluctant to proceed with privatization, but like Telekom Srbija BH Telecom’s financial performance has declined recently and the company announced a 9.9% fall in net profits in the first half of this year.

Even where governments have managed to find buyers for state telecom companies, in most cases these deals have later turned sour.

Interference on the line

Pristina is embroiled in an international legal dispute over the failed privatization of Post and Telecommunications of Kosovo (PTK). ACP Axos Capital won the tender to acquire a 75% stake in PTK in April 2013, but the parliament voted against the deal. In June, Axos filed for arbitration at the International Centre for Settlement of Investment Disputes (ICSID). If the court finds in favour of the German investor, Kosovo could have to pay up to €500mn in damages.

Back in 2011, the US Securities and Exchange Commission charged Hungary’s Magyar Telekom with bribing government and political party officials in both Macedonia and Montenegro in order to win business and shut out competitors. Magyar Telekom's parent company Deutsche Telekom was charged with breaching the Foreign Corrupt Practices Act.

Makedonski Telekom has been part of Deutsche Telekom Group via Magyar Telekom since 2001, while Magyar Telekom bought 76.53% of Montenegro’s Crnogorski Telekom four years later. “Magyar Telekom's senior executives used sham contracts to funnel millions of dollars in corrupt payments to foreign officials who could help them keep competitors out and win business,” said Kara Novaco Brockmeyer, chief of the SEC enforcement division's FCPA unit in a December 2011 statement.

The Makedonski Telekom case erupted again in Macedonia in September when testimony given by the country’s former deputy secretary for state security, Slobodan Bogoevski, was revealed in court transcripts published by Macedonian news portal MKD. Bogoevski accused former prime minister Vlado Buckovski and leaders of the junior ruling Democratic Union for Integration (DUI) party of taking bribes from the company. Both Buckovski and DUI leaders have denied the accusations.

Bogoevski’s testimony helped revive the case in the US, and Metodi Zajkov, secretary general of Transparency International Macedonia told bne IntelliNews that there are ongoing discussions in Skopje about possibly opening a domestic inquiry.

This chequered history does not bode well for future sales of telecom companies from the former Yugoslavia.

Pick a number 

Corruption remains a serious problem in several countries, with most scoring well below CEE countries on Transparency International’s annual Corruption Perceptions Index. Populations in Serbia and other countries are declining, and Southeast Europe as a whole lags behind CEE in economic development. A September World Bank report found that the convergence rate of GDP per capita between Southeast Europe and the EU has “stagnated” recently after progress between 2000 and 2007.

However, this does not explain why both Romania and Albania managed to sell majority stakes in their telecom incumbents, while countries in the former Yugoslavia have failed – although the post-privatization history of Bulgaria Telecommunication Company (BTC) has also been mired in controversy.

Mario Holzner, deputy director and research economist at the Vienna Institute for International Economic Studies (wiiw), suggests that the difficulty in completing privatizations in the former Yugoslavia, and the high level of popular opposition, are linked to the unique economic structure. “Serbia was a latecomer to the privatization issue and, as in other countries in the former Yugoslavia, had a history of worker self-management. Unlike with the central planning approach of most countries in the region, managers had a lot to say in how their companies were run and in many cases the firms were owned by the managers,” says Holzner.

“Another important factor was the wars in the 1990s, as a result of which few foreign investors were interested in taking over existing structures,” he adds.

Overcoming these issues and convincing international investors of the attractiveness of their telecom operators will be critical if governments in the former Yugoslavia are to succeed in privatizing these assets. However, as Holzner points out, privatization is already a contentious issue in countries across the region. Even in long-time EU member state Slovenia thousands demonstrated earlier this year against the planned Teleom Slovenije privatization.

This was also illustrated in the Muslim-Croat Bosnian Federation where a dispute over the management of HT Mostar and other state-controlled companies split prime minister Fadil Novalic's coalition government in June. The decision by the junior ruling Social Democratic Party of Montenegro (SDP) to back the probe into the sale of Montenegro Telekom contributed to the current rift within the ruling coalition in Podgorica, where the Democratic Party of Socialists and SDP are only hanging together in the hope of securing an invitation to join Nato.

In Serbia, PM Vucic’s government received a boost when better-than-expected macroeconomic data for 2015 led to the International Monetary Fund (IMF) giving the go-ahead for a modest increase in public sector wages and pensions, partially reversing the 10% cut made a year ago. As Erste’s Dodig points out, Vucic is not under pressure to sell off Telekom Srbija, as the pay rise will make the Serbian public more sympathetic to his government’s linked fiscal austerity and privatization programmes aimed at getting the economy onto a stable growth path.

However, a successful sale of Telekom Srbija for a good price – on the heels of the public sector pay raise – would substantially raise the credibility of the process and could encourage future sales of telecom incumbents elsewhere in the region.