Tim Gosling in Prague -
O2 Czech Republic's annual general meeting on April 28 approved a spin-off of the telecommunications company's infrastructure assets, as expected. The vote pushes through the first ever voluntary split of a major telco in Europe.
Shareholder fury, analyst downgrades and a steep fall in the stock price have accompanied the restructuring of O2 CR, the country's biggest mobile and fixed-line operator. With the company about to be split down the middle, the strategy is anything but clear.
The market has been wary ever since PPF Group bought a 65.9% stake in O2 CR from Spain's Telefonica in early 2014. The secretive Czech financial group – owned by the country's richest man, Petr Kellner – has since raised its holding to around 83%, meaning approval of its plan to spin off of O2 CR's mobile and fixed-line infrastructure into a new company, to be called Ceska Telekomunikacni Infrastruktura (Cetin), was a formality.
Following the separation, the rump O2 CR will provide voice and data services as well as television. Shares in the new infrastructure company Cetin will not be listed.
However, PPF's controversial stewardship – a CZK25bn loan that it took from O2 CR to help it pay for the acquisition also had minorities up in arms – has looked a little brighter in recent weeks. It offered a positive surprise in mid-April when it said it was confident first-quarter results would beat analysts' expectations. And the AGM also saw a dividend of CZK13 per share approved on 2014 results. Most had expected the controversial loan meant no payout would come, but the company will now share out CZK4.1bn.
The main driver of O2's share price, however, which has dropped around 30% since PPF agreed the acquisition in late 2013, is the spin-off. While that has now officially been given the green light, the overall strategy remains opaque. O2 CR remains somewhat tight-lipped; supervisory board chairman Martin Stefunko said blandly in early March that the split would help cut costs and ease regulatory hurdles.
Flipped on its head
Analysts appear befuddled. Although unsure of what will come next, few suggest the split will help O2 CR tap growth opportunities on the Czech market, which as elsewhere are seen in data and IT. The voluntary split of services and infrastructure is the first ever in Europe.
"Typically, the providers want to keep the services and infrastructure tied together to leverage market power, while the regulator wants them split to promote more market competition," notes John Gole, who heads telecom analysis in Europe, the Middle East and Africa for IDC. "O2 CR is flipping that on its head."
Vera Sutedja at Erste Bank agrees there are definitely synergies when services and infrastructure are joined, "but the split should unlock some of the value of the infrastructure." Regarding O2 CR, she wrote in March that without details on what it will be charged by Cetin to use the infrastructure, it is not possible to estimate its post-spin-off value.
The split appears heavily tilted towards growing the infrastructure business then. Cetin is likely to look to expand, analysts guess, adding to its offer of the use of its infrastructure to other operators perhaps via acquisitions or by pushing into cloud and data. To do that it will likely embrace regulatory control, and may receive "regulatory benefits or even gain some state support," Gole suggests.
A ray of light for O2 CR would be to largely escape the regulator, but the direct advantages for the service provider appear somewhat limited. There may be some financing advantage, suggests Josef Nemy at Kommercni banka, who notes that the "long-term investment horizon of infrastructure can be at odds with that of service providers". However, the split will also incur costs, and it's unclear if the benefits will make up for these, he adds.
The service provider has made few clear decisions about its plans for the telecom growth segments such as cloud and data, suggesting the prime strategy will be to continue cutting costs. O2 CR's recent results come on the back of a fall in revenue, as heavier competition on the Czech mobile market forces prices lower. "Private equity investors are maybe not saddled with the usual mindset of telecom management, which is to always drive into new areas," suggests Gole. "They may just be happy to cut costs and raise profitability."
Indeed, O2 CR's chief executive, Tomas Budnik, said in a statement accompanying the 2014 results that saw net profit drop 30%, despite a 10% cut in operating costs, that: "We changed our corporate values, established our new priorities and streamlined operations."
Added Tomas Kouril, the chief financial officer: "We will continue transforming the company in 2015."
"Innovative" or "unique", the split of the company is certainly seen as extreme. The only similar move in Europe was forced on BT by the regulator in 2006. Still, the former UK incumbent fell short of a full divorce, merely packing its infrastructure into a new unit called Openreach.
At the same time, BT has spent the last few months vigorously fighting pressure from its rivals to divest the wires and optics entirely. They claim the parent company has seen returns from the infrastructure division spike unfairly over the past eight years.
Unsurprisingly, British telecom regulator Ofsted has suggested it backs the call, but the Czech watchdog should be wary of celebrating Cetin too soon. Analysts at BT say a full separation of services and infrastructure has been done just once, in New Zealand. That has led to under investment in infrastructure and higher prices, they claim.
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