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Wednesday, 13 November 2013

Clouds over Telekom Slovenije privatisation plan

The Slovenian Compensation Company (SOD) appointed Citigroup Global Markets Limited as a financial advisor for the privatisation of Telekom Slovenije. The agreement was signed on 30 October 2013. The Slovenian government is determined to sell Telekom Slovenije (LJSE:TLSG) by the end of 2014. This is the third time the Government has considered selling the state’s stake in the incumbent telecommunications operator. In May, it prepared a privatisation plan with a set of 15 companies, including Telekom Slovenije, to be sold off. The National Assembly approved the privatisation plan on 21 June 2013.

Major shareholders agree to sell their stakes


SOD, which directly holds a 4,25% shareholding in Telekom Slovenije and represents the Republic of Slovenia with a 62,53% shareholding, on 29 August 2013 signed an agreement on a joint sale of their shareholdings with the Slovenian Capital Company (KAD), the Sava Reinsurance Company (LJSE:POSR), and the Triglav Insurance Company (LJSE:ZVTG). Their shares represent 73,08% of the incumbent’s capital. There are four additional shareholders (i.e. Modra zavarovalnica, Nova Ljubljanska banka, Nova KBM (LJSE:KBMR), Abanka (LJSE:ABKN)), that are willing to sell their stakes in Telekom Slovenije. A prospect buyer could thus acquire a control stake of 75,93% in the company.


The state ownership of the companies signing the agreement is as follows (as of 30 June 2013):

  • SOD and KAD are 100% owned by the Republic of Slovenia;
  • Sava Reinsurance Company is 25% owned by SOD, 4,15% by Modra Zavarovalnica and 3,80% by Abanka;
  • Triglav Insurance Company is 34,47% owned by the Pension and Disability Insurance Institute of Slovenia, 28,07% by SOD and 1,12% by HIT (which is 60% owned by KAD, SOD and six municipalities).

Among the four additional companies willing to sell their stakes, the state ownership is as follows (as of 30 June 2013):

  • Nova KBM is 91,24% owned by the Republic of Slovenia, 0,58% by KAD and 0,39% by SOD. Three more 100% state owned companies have minority shareholdings in the bank, i.e. Pošta Slovenije, GEN Energija (0,77%) and ELES (0,29%);
  • Nova Ljubljanska banka is 77,51% owned by the Republic of Slovenia, 6,23% by KAD, 5,58% by SOD and 1,27% by Triglav Insurance Company, plus minority shareholdings of other companies with partial state ownership;
  • Abanka is 25,60% owned by Triglav Insurance Company, 23,83% by Sava (18,71% owned by KAD and 11,06% by SOD, plus minority shareholdings of other companies with partial state ownership).

Privatisation of Telekom Slovenije is not a must

The privatisation of Telekom Slovenije came to the agenda of the Slovenian government again when it considered economic policy measures of the National Reform Programme 2013 - 2014 and the Stability Programme 2013. Privatisation is envisaged as a key measure of both programmes as the Government strives to boost economic activity and balance public finances. In October, the first of the state owned companies set for privatisation was sold. A 73,12% state’s stake in Helios was acquired by the Ring International Holding, an Austrian industrial group, for over EUR 250 million.

Which of the companies will be sold next? Telekom Slovenije is probably the most attractive purchase prospect among the state assets to be sold off. A question is, whether its privatisation is really required to save the state's finances. The answer is probably negative, if we consider only the long term budgetary prospects.

The Slovenian financial hole is just too big to be filled solely by privatisation proceeds. According to revised Fitch Ratings estimates, the cost of recapitalising the Slovenian banking sector has risen to about EUR 4,6 billion or 13% of GDP. Slovenian companies need additional EUR 5 billion equity capital to reduce their debt. Selling off state assets may also not speed up the recovery of the national economy. However, some divestments of state assets are required to ensure the stability and liquidity of public finances, and the credibility of the Government’s reform plans.

So why privatise Telekom Slovenije? The Government expects that the privatisation of Telekom Slovenije would generate substantial proceeds and significantly contribute to reducing the public debt. The state’s stake in the incumbent is worth over EUR 500 million at current market prices (LJSE:TLSG), while the Government anticipates an additional premium of over 40% and income of over EUR 700 million.

This is much less than in the failed privatisation attempt in 2008, when Bain Capital and Axos Capital, and Iceland’s Skipti both offered EUR 400 per share. The state’s 74,13% stake was EUR 1,9 billion worth. However, the Government cancelled the sale of Telekom Slovenije in March 2008, saying the bids were too low.

State ownership resulted in operational inefficiencies

While achieving the highest possible proceeds is the key short term objective of the privatisation process, long-term objectives and benefits of the privatisation of Telekom Slovenije are more important.

State ownership resulted in operational inefficiencies that have accumulated over time due to lack of good and transparent corporate governance. Telekom Slovenije has been less efficient than its European counterparts. As already shown in 2007 at its highs, the company’s performance was considerably below the average of the EU telecommunications incumbents. Latest comparisons confirm previous findings.

Telekom Slovenije has been overly dependent on domestic suppliers of IT and network technologies that have (traditionally) used it as a testbed and showcase for their products. Such a relationship has not been always beneficial to the incumbent. It could result in higher development and deployment costs, delayed introduction of new technology, and delayed launch of new services. In certain cases, this could lead to competitive disadvantage and lost market shares.

Criminal charges reported by media have revealed overpaid consulting and research projects, which may have been only the tip of the iceberg. Several projects have been over budget and over schedule, but have never been properly investigated. Not to mention overpriced and badly managed acquisitions in South Eastern Europe, resulted in huge write-offs and losses.

Faced with declining revenues, Telekom Slovenije made a strategic decision to expand its business through acquisitions in the mid 2000’s. But the decision came years too late as competitive pressure at the domestic market had already increased, following the entrance of a new competitor (T-2) and strengthened market position of the leading cable operator (Telemach). So instead of investing at home, Telekom Slovenije focused on unprecedented expansion and investment in South Eastern Europe.

It hugely overpaid its acquisitions in Albania, Bosnia and Herzegovina, Kosovo, and Macedonia, and was overly generous in buying out minority shareholders. Following a disclosure of irregularities, Telekom Slovenije determined the fair value of its investments in South East European subsidiaries and recognised impairments exceeding EUR 317 million, of which EUR 266 million were impaired in 2010. The total value of investments in subsidiaries in South Eastern Europe as of 31 December 2012 was EUR 57,8 million (see Slovenia lacks telecoms network investment).

Due to lack of proper corporate governance, Telekom Slovenije has lost its development pace, which has been reflected in decreasing market shares in key service segments as reported by the national regulatory authority (NRA). Its investment in network upgrades and expansion has been insufficient in recent years. Last year, however, it earmarked significant investment to establish its own TV channel (Planet TV).

Proponents of privatisation argue that the state should retreat from the ownership of Telekom Slovenije as soon as possible. It is of the utmost importance for the incumbent to improve its corporate governance and introduce new management and working practices. These changes will lead to improvements in the incumbent’s efficiency and performance. Additional improvements will be achieved through better and more independent regulation, leading to stronger competitive pressure and reduction of rents in the Slovenian telecommunications sector.

Serving special interests at the expense of the public interest

Independent opinion leaders have recently spoken out openly about the need to combat corruption so widespread in Slovenian state owned companies. The consequences of long lasting corruptive and abusive practices have been overwhelming.

Although majority state-owned Telekom Slovenije has never pursued the so-called public interest. On the one hand, it followed the same objectives as pursued by private telecommunications operators. On the other hand, though, proponents of its privatisation believe the incumbent has rather engaged in state and regulatory capture to protect its vested interests. It has (presumably) developed closed links with and influence over the government and bureaucracy, political parties, courts, regulatory agencies and media.

The stakes for rent-seekers and other special interest groups are very high. Therefore, it is important for them to influence public opinion. As one of the largest advertisers, Telekom Slovenije can exert control and influence over the media directly or through the owners of the largest advertising agencies that control the buying and selling of advertising space (see Media Ownership). The control can be also exerted through supervisory boards of media companies, news agencies, state funds or other state owned companies. Last year, Telekom Slovenije even established its own TV channel.

There is a significant institutional mismatch between advocates of public and special interests. Special interest groups monopolise public debate and the voice of public interest groups is not heard. To make things worse, the Government is substantially subsidizing leading advocates of special interests of national ICT barons. It is no wonder that Telekom Slovenije has become an impregnable state fortress that has for years successfully avoided regulatory and court sanctions for abusing dominance and causing damage to competitors and customers

Privatisation could improve the corporate governance and performance of Telekom Slovenije that has become a cash-cow for various special interest groups and rent-seekers of all political stripes. It could also reduce the level of cronyism and corruptive practices. This would lead to more efficient regulation that could increase market competitiveness and improve consumer protection. It is of the utmost importance for the consumer welfare to increase independence of regulatory and judicial system, improve regulation, and enhance competition.

Special interest groups united against privatisation

Opponents of Telekom Slovenije's privatisation warn that the incumbent should remain in state ownership as national strategic infrastructure. They are primarily concerned about national security, job losses and the pace of investment. They believe that the state ownership is essential to national sovereignty and security, and express fears over illegal surveillance of communications. They warn that privatisation may also have negative effects on the provision of emergency communications. Other concerns include potentially reduced investment in networks and services that may jeopardise quality of universal service, abuse of dominant market position, increased prices of services, and reduced incumbent’s social responsibility.

Unions and employees represent the largest and most vocal interest group in the privatisation of Telekom Slovenije. They may oppose privatisation as they fear sharp cost cutting and massive layoffs. Main Slovenian financial daily newspaper Finance reports that almost one third of employees in the incumbent’s domestic operations may lose their jobs within the next five years. The unions may win top management's support against privatisation as they have traditionally been in good relations. They may also try to win support of political parties and other special interest groups.

The most influential special interest group is formed around the central national higher education institution and the leading telecommunications equipment and solution provider. They are a focal point of various state and EU funded institutions and projects. The interest group promotes the development of domestic telecommunications industry. It also promotes cooperation of research institutions and universities with Telekom Slovenije and tries to uphold or increase the current level of cooperation. The group is aggressively promoting the interests of domestic suppliers and warning that privatisation may endanger their prospects.

There is also a plethora of associations, sport and cultural organisations, charities and other institutions that rely largely on donations and sponsorships of Telekom Slovenije (and other large state owned companies). For them, Telekom Slovenia is merely a cash cow and they all fear of losing a wealthy patron. In recent years, the incumbent’s budget for sponsorships and donations has represented between 0,5% and 0,7% of the operating revenues. In addition to providing financial support, Telekom Slovenije has also provided its services in sponsorship and donation projects. The total marketing expenses, which have also been a target of rent-seekers, have not been transparently reported. They have been reported along with insurance and entertainment costs, which all together have represented between 3% and 4% of the operating revenues.

Barriers to privatisation

The benefits of privatisation of Telekom Slovenije are potentially enormous. However, there are several barriers that could delay or even stop privatisation. First of all, there have been over EUR 600 million damages claims in competition cases against Telekom Slovenije. This could significantly reduce the value of the company and thus the state’s privatisation proceeds. Yet, the chairman of the management board believes majority of competition cases will face the same fate as ABM. It had claimed EUR 4,1 million in damages for abuse of dominance. A court of first instance awarded ABM EUR 2,3 million damages (based on damages calculated by an expert witness to the court), but a higher court overturned the decision and awarded the plaintiff only EUR 62 thousand in damages from Telekom Slovenije. 

Another barrier to privatisation is posed by the national regulatory authority that has delayed the assignment of the 800 MHz spectrum band for several years. The assignment of this spectrum was included as a part of a mega auction which could also have an impact on the value of Telekom Slovenije. The regulator’s decision to delay deployment of mobile broadband in rural areas has been widely criticised. A deadline for the assignment of radio frequencies is next June, so the auction should be completed as soon as possible. However, the whole process seems to be rather uncertain and could be further delayed.

Minister of Education, Science and Sport Jernej Pikalo presented two proposals to safeguard public interests in the privatisation process of Telekom Slovenije. He first proposed a structural separation of fibre and copper network infrastructure from services operations and placing it into a separate (state owned) legal entity. Later, he proposed a range of strict non-price obligations for prospective buyers in order to ensure further development of Telekom Slovenije, investments in electronic communications infrastructure, stability of employment in Telekom Slovenije, and further cooperation with local partners, especially universities and ICT companies.

The non-price obligations have not come as a surprise as they reflect the lobbying clout of special interest groups, which are also financed by the Ministry of Education, Science and Sport. It is less known among the special interest groups, though, that the non-price obligations as proposed are not in public interest as they may reduce privatisation proceeds. Moreover, they are very likely in breach of the EU state aid rules.

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