Mike Collier in Riga -

The Latvian government's flagship privatization deal looks to be sinking without trace.

The leveraged management buyout (MBO) of state telecommunications company Lattelecom was memorably described by one local magazine as the "Deal of the Decade" and was due to be rubber-stamped at a cabinet meeting on Tuesday, November 6. However, the previous Friday it emerged that the cabinet had dropped Lattelecom from its agenda, sparking fears the deal was in trouble.

Rather than coming out with a simple denial that the buyout is floundering, the relevant parties have remained ominously silent and well-placed sources say there are serious doubts the deal will proceed as planned.

The highly complex - and controversial - deal, announced in September, involves the state taking back the 49% stake in the fixed-line operator currently owned by TeliaSonera and then selling the whole company on to management without a tender. The buyout is priced at about €427m, of which €285m will be borrowed from a consortium of four banks, and the remaining €142m will come from the two investors - Lattelecom management and its strategic partner US private equity firm Blackstone Group. Blackstone will take 50.01% of the voting shares in the new firm, the Lattelecom people will receive 49.99 % of the voting rights.

There are several reasons why the deal has run aground, say observers. For a start, the Latvian government's attention is elsewhere, with weekly demonstrations taking place in the streets of Riga against an administration that is perceived as being rife with cronyism.

The minister who finds himself responsible for the Lattelecom deal by default is actually the justice minister, Gaidis Berzins, even though it comes under the remit of the Economics Ministry. Economics Minister Juris Strods resigned nearly two months ago and Prime Minister Aigars Kalvitis has been forced to fill in that position himself while he conducts an evermore desperate search for a replacement. Even an obscure young part-time economist who was offered the job refused. With Kalvitis on an official visit to the US, Berzins finds the deal has fallen into his lap just as it reaches a critical point.

When questioned about the deal on November 2, Berzins simply tread water, saying: "Making a crucial decision in the current politically unstable situation would be irresponsible. The decision has to be made by a full-bodied economics minister in a stable government, otherwise the privatisation process would be rushed and could cause negative consequences."

Smoke and mirrors

More worrying are concerns that the complex structure of the proposed deal might actually be illegal. Berzins himself admits that his Justice Ministry has raised several questions about the privatisation plan from the legal point of view and other ministries have voiced similar concerns.

However, the clock is ticking and every second knocks value off the €427m price tag - which itself could be another reason for the government's reluctance to go through with the deal. A poll on a popular TV debate show showed the public feels Lattelecom is being sold off too cheaply. There is also a growing feeling among voters that ministers and their associates will end up lining their own pockets from the deal. Information that various new companies had been set up as part of the deal's complex structure - including one in Luxembourg - only fuelled suspicions that the only real benefactors of the deal would be the notorious oligarchs and their political placemen. The government might feel that it simply cannot afford to press ahead with a sell-off that might be interpreted as an attempt to stuff its pockets as it heads for the exit.

"A decision has to be made in the near future to be able to close the deal this year," but that now seems an unlikely prospect, admits Lattelecom spokeswoman Maija Celmina.

Blackstone and its partners might be prepared to wait a month or two, but no longer, according to influential Latvian telecom-watcher Juris Kaza.

"The Blackstone Group probably won't wait more than three months, six maximum, for the deal to be approved, then it will walk away," Kaza believes. "Should the deal fall through, Nils Melngailis will resign as Lattelecom CEO. If Nils goes, then I see TeliaSonera getting Lattelecom at the end of a long and rocky road ahead - perhaps a desperately organized public auction in mid-2009 - and getting it, probably, on the cheap."

If Lattelecom did end up in the hands of the TeliaSonera, the irony would be rich indeed. TeliaSonera's desire to control both Lattelecom and its mobile sister firm LMT was what prompted the government to seek an alternative in the first place. As part of the planned MBO, TeliaSonera has agreed to take full ownership of LMT, in which it already directly owns 49% and has management control. So whatever happens now, it looks like TeliaSonera will probably win either way.

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