Private equity now on cable in Poland

By bne IntelliNews May 9, 2013

Nicholas Watson in Prague -

Has cable's time come in Poland? That's the bet private equity group Warburg Pincus is making with its purchase of a stake in Polish cable operator INEA, and analysts believe more such deals will be struck over the next couple of years.

Though the terms of the investment were not disclosed on April 23, the transaction between INEA and Warburg is believed to be the largest private equity investment in Poland this year - funds which will enable the cable company to expand and upgrade its network, as well as make acquisitions in the country's fragmented cable market. In return, Warburg will get a stake of under 50% in Poland's fourth largest cable operator, which operates in the western region of Wielkopolska.

Janusz Kosinski, co-founder and president of INEA, says bringing in Warburg will allow it to complete its Next Generation Access (NGA) network in the Wielkopolska Region on as large a scale as possible, providing hundreds of thousands of Poles with what is known in the business as triple-play bundles (telephone, internet and television) through fibre-optic cables. "Since we engaged in the project to construct an NGA network, we have been looking for a partner who would allow us to complete this project," Kosinski says.

INEA will also gain an experienced partner from the deal. Warburg has a lot of experience in the cable industry, including creating Dutch cable group Ziggo through the merger of three smaller firms, and well as in the Central and Eastern Europe region, having invested more than $1bn there since 1997. On May 10, Warburg announced it had finished raising another $11.2bn global fund, which will be invested in regions such as CEE and businesses such as telecoms.

"Warburg Pincus is of course one of the main operators and its experience in the Netherlands and other significant markets gives it rich experience, not only in knowing how to bundle services attractive to customers, but also in shifting skilled personnel to areas where skills are needed," says Paul Budde of BuddeComm, an independent research and consultancy company focused on the telecommunications market. "This has been the recent hallmark of companies such as France Telecom and Vodafone which have their fingers in many pies and operate in several sectors within individual markets."


For a private equity outfit like Warburg, this deal ticks most of the boxes: there's stable cash flow, good growth prospects from regular business development as well as through M&A, and the company operates in a sector that usually offers owners a relatively simple exit via a sale or IPO.

Poland has badly lagged other countries in the region in getting people hooked up to broadband internet, not least because as has often been the case in Poland it is hard to break the hold of entrenched interests. Former telecom incumbent Telekomunikacja Polska had a monopoly on the infrastructure side of the business as late as 2007. According to the consultancy IDC, broadband penetration among Polish households was 31% at year-end 2011, compared with 44% in Slovakia, 52% in Hungary, 53% in the Czech Republic and 61% in Lithuania. That leaves a lot of growth potential for well-funded players like INEA.

The regional nature of Poland's cable market also keeps the larger players like UPC at bay for now, allowing firms like INEA to grow and consolidate their patch. Currently, INEA has about 170,000 subscribers, the biggest among the 15 smaller cable companies operating in what is the third largest province of Poland. The largest broadband internet player in Poland is UPC, which at the end of last year had 854,700 subscribers. "Poland's cable market is certainly competitive, with UPC, Vectra, Multimedia Polska and Aster all active, though they tend to concentrate in their own areas," notes Budde. "The market remains fragmented, with a number of smaller regional players, and is ripe for further consolidation. As a recent example of consolidation, last month Netia signed an agreement with UPC to acquire infrastructure previously operated by Aster. This part of the network covers about 446,000 homes, apartments and businesses in Warsaw and Krakow and increased Netia's coverage by 17% to 2.8m homes passed."

Budde also says the general economic backdrop makes Poland an attractive market for investors. Although the shine has come off the economy lately - Poland was the only EU country to avoid recession following the 2008 crisis - it's nevertheless expected to still grow about 1.2% this year, which is good by European standards. "The telecom market is also growing, albeit slowing, and this also bucks the trend for most of Europe. Just as thousands of Poles have returned home from the UK during the past two-three years (since the opportunities are now better domestically than in the UK), so too are investors attracted to Poland's telecoms market as a growth area," Budde says.

Finally, there's government money on offer too, which is especially helpful during tough economic times. Part of Warburg's investment will go into funding Wielkopolska Sieć Szerokopasmowa (WSS), a partnership with the local government which will construct a 4,000km fibre-optic network that puts 95% of Wielkopolskie households within a 4km radius from the closest distribution node. When completed, INEA says its network will be the most advanced in Poland, providing high-speed broadband access to over 500,000 homes across the entire Wielkopolska Region.

The WSS project could also qualify for EU money. The European Commission's "Digital Agenda for Europe" aims to give all European citizens broadband connections of at least 30 Mbps by 2020 and have half of households able to access at least 100 Mbps. The Commission has given Poland around €1.5bn to spend between 2007 and 2013 to help achieve the plan's aims. "The Wielkopolska Sieć Szerokopasmowa project... will be in part financed with support from the European Union, via a Polish development programme," says Paul Best, a Warburg managing director, adding that it's still subject to final approval from the EU.

All this points to the probability that more foreign investment will find its way into Poland's cable sector. "We would expect to see further investor interest later this year and into 2014," Budde predicts.

Yet it's not a one-way bet. Growing faster than fixed broadband in Poland is mobile broadband, which is convincing many Polish households that they don't need a fixed connection at all, especially in the less-developed eastern part of the country where the infrastructure is lagging even further behind the western regions. "The mobile broadband market has been more vibrant and competitive than the fixed broadband market," IDC analyst Michal Wlasenko said in a report.

Warburg's Best says there is room in the market for both fixed and mobile broadband, but fixed-line and particularly the fibre-based infrastructure operated by INEA and other cable operators currently offer dramatically faster speeds and bandwidth than mobile solutions. "We believe that this technological advantage will be maintained for the foreseeable future," Best says.

Moreover, he notes, the "mobile" solutions on offer are often based on Wifi technology, delivered in so-called "hotspots" through fixed-line networks. "INEA has a wide network of such hotspots in the city of Poznan, enabling consumers to access broadband services, on mobile devices, though the INEA network... INEA is also currently trialing a mobile broadband offering in rural areas where it does not have a fixed line network presence."

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