Poland corporate: Menatep morphs

By bne IntelliNews March 1, 2006

Patricia Koza -

In Central Europe's booming but still fragmented telecommunications market, acquisitive GTS Central Europe has emerged as one of the region's biggest alternative carriers in just two years.

But as a Russian firm trying to expand in the unfriendly market of Poland and one connected to controversial Russian billionaire Mikhail Khodorkovsky to boot, GTS may be taking on its greatest challenge yet.

GTS was established in 1994 and owns five alternative carriers in the Czech Republic, Hungary, Poland, Romania and Slovakia that provide voice, data and Internet services to corporations. Enjoying seven years of strong growth, GTS suddenly found itself cast adrift in 2001 when its Dutch-American parent KPNQwest went bust, unable to obtain external financing just as its competitors were locked in bruising price wars.

Some fast footwork was needed. The management managed to cut costs, streamline operations and got better at anticipating customers' needs until the business returned to profit and creditors re-opened their wallets.

It was an impressive performance. So impressive it attracted the attention of Group Menatep, the investment vehicle of the Russian tycoon Khodorkovsky, which - through a subsidiary, Antel Holdings - acquired GTS for €36.5 million in 2002.


This was the year before the Kremlin declared open warfare, but two years after Yukos' shares began to fly on the Russian stock market, making Khodorkovsky the richest man in Russia. The principal Yukos shareholders pulled some money out of the oil company and decided to invest in something else - anything but oil. Khodorkovsky hired three smart bankers -- Francois Buclez, Oleg Pavlov and Alan Sipols - to run Group Menatep Invesetments (as it was initally called), who all cut their teeth working for Russian-based investment banks. Pavlov put together a ground breaking convertible bond for Menatep in 2001 while still director of the corporate finance department of Brunswick UBS and is a pioneer in the Russian debt instrument market. Buclez and Sipols were responsible for portfolio and private equity investments.

“I met Buclez in 2002 when he turned up in London and we spent the afternoon together,” says one investment banker who didn't want to be named talking about clients.

“He was looking at everything except Yukos, acting as a fund manager for Group Menatep.”

As the Russian authorities began their campaign against Khodorkovsky and his oil company Yukos, Menatep began a ninemonth review of its portfolio, which held about €17 billion in managed assets.

“We started to rationalise the investments we wanted to keep and grow,” Tim Osborne, managing director of the investment firm, now called GML (for Group Menatep Ltd.), said in an interview from his office in Gloucestershire, the UK. “GTS was certainly on the 'keep and grow' side of the line.”


Beginning in January 2004, the new owners bankrolled a period of rapid expansion for GTS. In the Czech Republic GTS acquired Aliatel, the largest Czech alternative fixed- Contactel, a Czech subsidiary of Denmark's incumbent TDC, to set itself up as the main rival to incumbent Cesky Telecom. It also scooped up Telenor Networks and Nextra, the Czech and Slovak subsidiaries of Norway's dominant carrier Telenor, and Quadia DCT, a Bratislava-based provider of voice Internet and data services for business.

Then last year, in a coup de grâce that took some market watchers by surprise, GTS acquired 97.5% of Energis Polska from the national grid operator PSE and private equity shop Innova Capital.

With Energis providing the intercity links and GTS the big urban corporate customers, the merged companies in Poland created a countrywide operator offering full telecom services for business clients with cash flow of €18 million in 2005 on combined revenues of €102 million.

Overall, the acquisitions are expected to boost GTS' consolidated revenues to €385 million in 2006. Aside from a 26% stake in Israel's Modgal plastics producer, GML is looking into possible investments in the energy sector in Eastern Europe and the Balkans, the Mediterranean and Asia, and has some minority investments in those regions. It is also "very seriously looking at alternative sources of energy" in Europe, Osborne said In the meantime, however, GML's fortunes have collapsed along with those of Yukos and its founder Khodorkovsky, who is serving nine years in a Siberian prison camp. GML's managed assets have shrunk to €2.5 billion- $3.3 billion as GML liquidated 95% of its holdings in Russia and expatriated the proceeds.

With the Russian state closing in on the remaining assets of Yukos, in which Menatep still reportedly holds a 60% stake, is GTS in danger once again of being starved to death?


Not at all, says Osborne. “In our thinking we've already written down the value of the Yukos investment to zero. Even though we've lost a huge percentage of our previous overall wealth, there's still some left and we're perfectly capable of supporting GTS,” he said.

“Our current intent is to continue to grow it, within the context of sensible investment.”

GTS still provides services or links to 20 countries ranging from Turkey to the Baltic states, and established a Croatian subsidiary in January. It has plans for units in Slovenia and Serbia this year as well, following a strategy of consolidating local markets by snapping up attractive targets based on valuations of their proforma cash flows ie. cash flows generated from the combined businesses.

“From an operational point of view, it's quite an interesting company,” reckons T.

Kuliszewicz, a telecom consultant. “What is not so clear is the financing. With Russian capital, you can't say what the possibilities are; they may have enormous money at a given time, and then not. It's a mystery. But it's quite interesting and we are watching it closely.”

GTS' Polish directors, which are still digesting the acquisition of Energis, are already talking up their next big step: gaining Telefonia Dialog or Exatel, two of the top three alternative operators in Poland (GTS Energis is fourth).

That poses two problems.

First, they're not exactly for sale. Dialog is owned by the copper giant KGHM and though its management is open to selling, its majority owner - the Polish state - is not so sure.

It's a similar case with Exatel, owned by the Polish electrical grid operator PSE, which is also owned by the Polish state, along with telecom assets held by the state railways and other assorted state-owned companies.

Poland has been toying with the idea of combining some of its telecom assets to create a combined fixed-line and mobile carrier that would compete with former state-owned incumbent Telekomunikacja Polska, now controlled by France Telecom, whose rates are among the highest in Europe. But until it firms up its plans, GTS - which says a merger with Exatel would create a company with combined revenue of over €250 million - must bide its time. Meanwhile, it has in its sights on two other smaller providers in the still-fragmented market, US-based Crowley Data Poland and ProFuturo Poland, which serves 12 cities.

The second problem could be the nature of GTS' parent. Poles have an antipathy toward anything that smacks of Russian influence, as evidenced by the repeated rejection of overtures from the likes of Gazprom and Lukoil to buy energy assets in Poland. Tomasz Galas, vice president of GTS Energis in Poland, insists the company has not encountered any such prejudices from its business partners. However, political partners may prove to be a different matter entirely.

“They're not large enough to make Polish politicians scared at this point,” said Pawel Puchalski, an analyst at the brokerage BZ WBK. “It's not noticeable - yet. There could be worries, though, if they acquired Dialog.”

Osborne says the Russian connection should not deter interested parties. “GML is so distanced from Russia that hopefully that would not be a problem for anybody,” he said.

“We can't hide what we are; if someone has a problem with that, we'll have to live with it.

But they should look at the management, who are all Western, look at the track record, and make their own assessment from that.”

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