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Friday, 20 September 2013

Telekom Slovenije – a brief history of its privatisation

Telekom Slovenije, one of Slovenia’s largest and most important business groups, has successfully resisted privatisation since its separation from PTT Slovenije in 1995. Both privatisation attempts were marked with strong opposition against privatisation. For proponents of state ownership Telekom Slovenije has been a strategic company and valuable state’s crown jewel that should remain state-owned. This is the third time the government has considered selling its stake in the incumbent telecommunications operator. The government seems to be determined to carry out the privatisation of Telekom Slovenije. However, its privatisation plan is likely to face strong opposition which is already growing.

The first privatisation attempt – a missed peak of the telecom hype


The first attempt to privatise Telekom Slovenije was made between 1999 and 2001. The government started the privatisation process in 1999 and appointed members of the privatisation commission. In 2000, it hired the consultancy firm PriceWaterhouseCoopers (PWC) that prepared three privatisation models. Each envisaged a reduction of the state’s stake in Telekom Slovenije below 50% either immediately or in a short run of two to three years. 

The privatisation process unfortunately started rather late and the government missed the best time for selling the incumbent. The market value of telecommunications operators decreased significantly after the dot.com bubble burst in 2000 and 2001. Market conditions further worsened after 11 September 2001. The government did not want to sell its stake in the incumbent at price levels at which some of the central and eastern European incumbents were sold at that time. Therefore it stopped the privatisation process in autumn 2001. A year later it also objected to listing the incumbent’s shares on a stock exchange. The privatisation plans were finally postponed beyond 2004.

The second privatisation attempt


The second attempt to sell Telekom Slovenije was made between 2005 and 2008. The Government started the privatisation process by adopting the privatisation plan in December 2005. Six months later it adopted the strategic guidelines for selling the state’s stake in the incumbent operator. The state’s stake in Telekom Slovenije was 74,14 %. KAD (The Slovenian Capital Company) held a 5,59% shareholding, KAD – PPS (The First Pension Fund of the Republic of Slovenia) held a 1,77% shareholding, and SOD – The Slovenian Compensation Company held a 4,25% shareholding, in addition to a 62,53% shareholding of the Republic of Slovenia.

The strategic guidelines envisaged a listing of Telekom Slovenije’s shares on the Slovenian stock exchange. Its shares have been on the official Ljubljana Stock Exchange market since 2 October 2006.

According to the Individual Programme of Sale of the Shares of the Republic of Slovenia in Telekom Slovenije, the subject of the sale of the state owned incumbent operator was the state’s direct and indirect ownership stake, excluding an ownership stake of 25% plus 1 share that the Republic of Slovenia intended to retain. Considering its total ownership stake, the subject of the sale was no more than a 49,13% state’s ownership stake in Telekom Slovenije as a whole, including all its subsidiaries.

An international invitation to submit expressions of interest and bids in the public tender for the sale of this stake was published on 31 August 2007 in the Slovenian and European Official Journals, as well as in the Financial Times.

Fifteen prospective buyers expressed interest by the deadline on 28 September 2007. The government privatisation commission overseeing the sale of the state’s stake in Telekom Slovenije granted the status of registered bidders to Croatia's T-Hrvatski Telekom (majority owned by Deutsche Telekom), Hungary’s Magyar Telekom (also controlled by the German incumbent), Slovenian retailer Engrotuš (parent of Slovenian alternative mobile operator Tušmobil), United Arab Emirates-based holding company Oger Telecom (parent of Turk Telekom), Telecom Egypt, Russian financial group Sistema (parent of largest Russian mobile operator MTS), Luxemburg-registered Skywheeler (a unit of international private equity firm Permira), UK-based Providence Equity, Macquarie Bank of Australia, Luxembourg-US buyout fund CEP III (operated by the private-equity firm The Carlyle Group), a consortium of US equity firm Bain Capital, Germany’s Axos Capital and Slovenian division of UK’s BT Global Services, UK-based international investment group Apax, Iceland's Skipti (parent of Icelandic incumbent operator Siminn), UK-based investment firm Babcock & Brown, and US-based SAC Private Capital Group.

Twelve of the aforementioned companies submitted non-binding bids on the basis of the Information Memorandum and other publicly accessible information about Telekom Slovenije by the deadline on 15 October 2007. The privatisation commission selected seven bidders for the second round of bidding, granting them a right to conduct due diligence and submit binding offers: a consortium of Bain Capital, Axos Capital and BT Global Services, CEP III (The Carlyle Group), Macquarie Bank, Magyar Telekom, Oger Telecom, Skipti and T-Hrvatski Telekom. The deadline for the submission of binding bids was set for 18 December 2007 and then extended to 4 January 2008.

The privatisation commission received three binding bids from the Bain Capital, Axos Capital and BT Global Services consortium, Magyar Telekom and Skipti. All three bidders were asked to supplement and improve their offers. Having considered the supplemented bids, the commission decided on 14 January 2008 to continue negotiations only with two suitors, namely with the Bain Capital, Axos Capital and BT Global Services consortium and Skipti. Magyar Telekom was excluded from the auction as it had not improved enough the bid. The first suitor proposed a two step purchase and Skipti offered cross-ownership with Telekom Slovenije.

On 3 March 2008, the privatisation commission proposed to the government to cancel the sale of the state’s stake in Telekom Slovenije, as none of the bidders satisfied its expectations. Further attempts to sell smaller stakes in 2008 and 2009 were also unsuccessful.

Why privatisation failed?


There has always been a strong opposition against the privatisation of Telekom Slovenije. The incumbent has been considered as one of the most valuable state’s crown jewels. It has also been a cash cow for various interest groups. The privatisation objectives, stated in the share sales programme, pursued by the government, revealed all major stakeholders and their interests in the privatisation process
  1. “Preserving the business functions of Telekom Slovenije Group. This, among other things, means that Telekom Slovenije d.d. will not become a representative branch office of the buyer, but will maintain its own corporate status, organisational structure and business functions.
  2. Keeping the development of the network and services within Telekom Slovenije Group at least proportionally equal to current levels in terms of manpower and assets employed. This means, among other things, that Telekom Slovenije Group will retain the employee structure for the development of the network and services (i.e. technically educated experts) and ensure financial resources for outsourcing works to other companies and individuals. In this way the existing development functions of Telekom Slovenije Group will not be transferred to the buyer or to others from the Republic of Slovenia.
  3. Increasing the value added generated in the telecommunications equipment and service sector in the Republic of Slovenia.
  4. Upholding Telekom Slovenije Group's cooperation with Slovenian research institutions and universities at a level that is, at a minimum, proportionally equal to the current level.
  5. Expansion of the Telekom Slovenije Group's operations to other countries through acquisitions of other companies, strategic partnerships and investments outside of Slovenia such that during the period of these objectives’ accomplishment the portion of the Telekom Slovenije Group's revenues generated outside of Slovenia is increased by at least 10% annually (compared to the previous year). Growth is necessary for the company's development, and may be achieved through expansion across geographic borders or through diversification to other market segments. A buyer's ability to expand Telekom Slovenije d.d. in the region would by all means have a positive impact on the development of the Slovenian economy.
  6. Ensuring development of network and services in accordance with a long-term business plan that will form a part of the share purchase agreement, in such a way that Telekom Slovenije Group's range of services will follow trends in countries with highly developed telecommunication sectors. The services offered to Slovenian consumers by Telekom Slovenije Group shall be equivalent to those services offered to users in the most developed EU countries.
  7. Ensuring equal opportunities for the use of the Telekom Slovenije Group's existing network to competitive service providers in accordance with valid EU directives and Slovenian legislation, including decisions of the national regulatory body (APEK).
  8. Introducing new business processes in Telekom Slovenije Group that aim to enhance efficiency and performance. The know-how and synergies of the buyer must be transferred to the business system of Telekom Slovenije d.d. thus improving its effectiveness.
  9. Ensuring international strategic connections to the Telekom Slovenije Group to facilitate of the launch of new services and leverage economies of scale, and to ensure more favourable conditions for subscribers roaming in other countries. Telekom Slovenije d.d. requires know-how to launch new services. Mobitel d.d. requires more favourable conditions for the purchase of terminal equipment and for international roaming of its subscribers.
    Some of the objectives were unrealistic from a business perspective and would hardly be acceptable for a potential buyer, especially a strategic partner.

    During the three year privatisation proceedings, a strong opposition against the government's privatisation plan for Telekom Slovenije was built up, especially as elections were approaching. At the end, even the coalition parties were not able to agree the privatisation of the incumbent. The leading political party neither did want a political crisis nor the anger of unions and other interest groups related and/or dependent on Telekom Slovenije. It finally stopped the privatisation.

    A new privatisation round


    The present government, faced with harsh economic conditions, was forced to prepare a privatisation plan to sell off state assetsTelekom Slovenije was one of the most valuable assets put on sale. Unfortunately, its current market capitalisation is far from that in 2008 when the stock (TLSG) price reached its highest value of EUR 507. The current market value of TLSG is EUR 110. The stock has gained almost 40% since the privatisation of Telekom Slovenije was put on the government's agenda.

    Despite a growing opposition against the sale of the state’s stake in Telekom Slovenije, the government seems to be determined to accomplish its privatisation. Shareholders, the majority of them state-owned companies, have already signed an agreement to sell a combined 72,73% of Telekom Slovenije. According to SOD, several other shareholders joined in with letters of intent, meaning that the buyer would be able to acquire more than 75% of the incumbent’s stock. The company is now selecting a financial consultant that should organise the sale and the selection is to be completed by the end of October 2013.

    While SOD is selecting the financial consultant, the opposition against the privatisation of Telekom Slovenije is building up again – both within the government and various interest groups. A proposal for structural separation of Telekom Slovenije into two companies by the Minister for Education, Science and Sport could also shake the privatisation process.

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