Tim Gosling in Prague -
PPF Group on November 5 sealed a deal to buy a majority stake in the Czech Republic's largest mobile operator Telefonica CR from the Spanish telecommunications group. The agreement could put a dent in the Czech regulator's hopes of encouraging greater competition on the market; it might also herald a new chapter in the emerging markets telecom space, suggest analysts.
The Netherlands-based PPF, controlled by the Czech Republic's richest man Petr Kellner, is to buy a 65.9% stake in the company that operates under the O2 brand for a total of CZK63.6bn (€2.47bn). That translates as CZK305.6 per share, according to the buyer - 2.1% below Telefonica CR's closing price on November 4.
PPF said in a statement that it will launch a mandatory offer for the rest of the shares once the acquisition is complete. Telefonica SA, however, will keep hold of its remaining 4.9% stake, and work as an "industrial and commercial partner for the next four years," the Spanish company said in its statement. With PPF hardly the most open to shareholder scrutiny, analysts fully expect Telefonica CR to be delisted.
The overall price of the deal for the Czech telecom operator, which is also a major player in Slovakia, is well ahead of forecasts made when talks between Telefonica and PPF were revealed in October. It had been predicted that it would go through at a relatively low price due to the fact that no other suitors were reported. Telefonica's need to shift the asset to reduce debt and fund acquisitions elsewhere in Europe was seen as another driver, as was the Czech regulator's efforts to introduce more competition on the market.
That said, PPF will pay only €2.06bn initially. A further €404m is "deferred." While neither statement made mention of any conditions on that payment, some analysts had previously suggested that given the uncertain outlook on the Czech mobile market, there could be some kind of performance-related mechanism included in the deal. Still, analysts at Erste Bank note that it could be better news than feared for minority shareholders facing the buyout offer, with the valuation implying "a considerable premium to CEE incumbents".
Renaissance Capital concurs. "We expect PPF to make a mandatory offer to minorities... at the same price, although one could argue that the Telefonica SA offer included a control premium," they note. "Still, we doubt shareholders would accept less than CZK305.6 [per] share, especially if PPF wants to delist. The Spanish seller said it 'may dispose of its shares subject to certain conditions once the mandatory offer is over'."
While Telefonica CR and Telefonica Slovakia will change their names after the deal goes through, they will continue to operate under the O2 brand for a maximum of four years, according to the agreement. The closure of the deal will need approval from Czech regulator CTU.
With PPF having no Czech telecom assets currently, the regulator looks to have few grounds to object. But it's unlikely to be too happy at the same time, because it has been pushing against resistance from the three major incumbents - Telefonica, Deutsche Telekom and Vodafone - for some time in a bid to shake up a market that suffers some of the highest mobile costs in the EU.
The CTU has recently defeated legal challenges from the big three to the reservation of space for a new operator in a forthcoming frequency auction. After the trio managed to derail the sale earlier this year, the bandwidth is set to go on the block on November 11.
However, the regulator may also have lost (at least) one of its two potential entrants. PPF said in September that it would not take part in the auction because the tender bans any new entrant from merging with another market participant for 15 years. It then sold the unit it had set up for that purpose to CEO Tomas Budnik, who renamed it Revolution Mobile. The company is one of the two non-incumbent bidders registered to take part in the sale.
There has been speculation that the move was sparked by PPF's interest in Telefonica CR, designed to both pressure the seller and give PPF a back-up plan in the event the talks failed. Some analysts suggest that the other bidder in the bandwidth auction - Tasciane, which is a unit of another closely-held Prague-based investment group KKCG - could also be a decoy.
"It is possible that the two declared new participants for a fourth mobile operator's licence in the Czech Republic were not entirely genuine," suggests Renaissance Capital, "and were used to deter Telefonica SA with the threat of worsening economics in mobile once a new player appeared. If we are right, this could mean there will be no fourth player in the Czech Republic."
In addition to sating Kellner's desire for a major presence on the Czech telecom market, Renaissance suggests that the purchase is likely to offer synergies to the other companies held by the somewhat murky group, particularly its recent start-up lender Air Bank. Going further, the deal could represent a new telecom model for the region, and drive further M&A.
"The transaction could imply a new chapter in the emerging markets telecoms space," Renaissance says, "demonstrating the relative value of telecoms companies (with their superior CRM [customer relationship management], distribution and billing systems) to modern consumer-finance-oriented companies. We think this is unlikely to be the last transaction of this sort in the space."
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